Reserve Bank of India Maintains Status Quo on Interest Rates

The Reserve Bank of India (RBI) today kept its interest rates unchanged while cutting its growth forecast but increasing its inflation outlook as the nation’s economic conditions remain sluggish.

While the decision to leave the policy repo rate unchanged at 8% was in line with forecasts in a recent Reuter’s poll, the RBI decided to cut the cash reserve ratio for banks by 0.25% to 4.25% in its credit policy review and indicated it may ease monetary policy further in the January-March quarter.

India’s central bank said the Survey of Professional Forecasters has lowered the country’s Gross Domestic Product (GDP) growth projection to 5.7% from 6.5% for the current fiscal year. The average wholesale price based inflation forecast is revised upwards to 7.7% from 7.3%.

“Spurring growth is back on the central bank’s agenda that had been obsessed with fighting inflation for the past two years,” 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, FDI in India declined by 59% year-on-year to $3.18 billion, reflecting the impact of slowing global economy.

“India’s strength lies in the fact that 70% of its economic activity is domestic oriented. Strengthening the domestic economy via cheaper credit will help offset the slowdown in global growth epitomized by continued troubles in the euro zone,” said Rangar.

The government has in the recent past undertaken a host of reform initiatives including the long awaited reforms allowing foreign direct investments (FDI) in multi-branded retail and aviation sectors but also financial reforms that will change the face of the insurance industry.

Last month, the RBI had kept the repo rate unchanged at 8% while industry leaders have been asking for a rate cut. It’s still well above the 6% set two years ago in Sept. 2010.

Finance Minister P Chidambaram unveiled a five-year roadmap for fiscal consolidation on Monday, emphasizing the need to control expenses and generate more revenue as the government targeted budget deficits of 5.3% of the Gross Domestic Product (GDP) this fiscal and 4.8% in the next.