Reserve Bank of India Keeps Interest Rates Steady

IndusView, Tuesday 31 July (London): The Reserve Bank of India (RBI) kept interest rates unchanged for the second time since June, in line with expectations, while cutting its growth forecast but increasing its inflation outlook as the nation’s economic conditions deteriorate.

The RBI left its policy repo rate at 8% and cash reserve ratio for banks at 4.75%. Wholesale price inflation remained above 7% in June and consumer price inflation was 10%.

"India’s central bank continues its balancing act of supporting growth while fighting inflation by keeping rates unchanged,” said Bundeep Singh Rangar, Chairman of London based advisory firm IndusView. “Increasing rates would have helped curb inflation but further slowed growth.”

India’s growth has been slowing, and hit a nine-year low of 5.3% in the March quarter, partly because of a global slowdown as well as weaker demand and investment activity at home. During April-May 2012 too, Foreign Direct Investments (FDI) in India declined by 59% year-on-year to $3.18 billion, reflecting the impact of slowing global economy.

Recently, Standard and Poor's and Fitch had lowered India's credit outlook to negative from stable citing reasons such as high inflation and inadequate reforms. “Attracting foreign investors, both institutional and individual, is critical to reversing the slowdown in growth and building a sound infrastructure,” said Bundeep Singh Rangar. “The consequence of having poor infrastructure was driven home yesterday when much of India was without electricity.”

After being hit by a massive power outage yesterday, the Confederation of India’s industry estimates the blackout to cost companies $107.5 million. The gap between demand and supply jumped to 10.2% in March from 7.7% the year earlier. Power cuts are common across swathes of India as the country battles an average 9% shortfall in meeting peak power demand that the government says shaves about 1.2% points off annual economic growth.

Prime Minister Manmohan Singh is seeking to secure $400 billion of investment in the power industry in the next five years as he targets an additional 76,000 megawatts in generation by 2017.

The stock market reacted to RBI's concerns over growth and inflation outlook. The 30-share BSE Sensex fell over 60 points or 0.6% after the policy announcement while Nifty also slipped into negative territory after staying relatively flat before the announcement. Bank stocks fell sharply. The BSE Bankex fell 1.1%.