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RBI announces mid-term review, no rate cuts | The Reserve Bank of India (RBI) announced its mid term credit policy review here on Monday,
and against the industry expectations, kept the short term lending rate and the
Cash Reserve Ratio (CRR) unchanged at 8 and 4.75 percent respectively. The RBI,
that had last slashed policy rates in April, contended that further reduction
in key rates would “exacerbate the inflationary pressures.” "Our assessment of
the current growth-inflation dynamic is that there are several factors responsible
for the slowdown in activity, particularly in investment, with the role of interest
rates being relatively small. Consequently, further reduction in the policy interest
rate at this juncture, rather than supporting growth, could exacerbate inflationary
pressures," the RBI said in a statement. The central bank said that the government
has failed to follow the path of fiscal consolidation it had called for in its
earlier policy statement. “The Reserve Bank had frontloaded the policy rate reduction
in April with a cut of 50 basis points. This decision was based on the premise
that the process of fiscal consolidation critical for inflation management would
get under way, along with other supply-side initiatives,” the RBI said, suggesting
that it was linking monetary policy to fiscal policy discipline. The government
has said that fiscal deficit will likely be at 5.1 per cent of gross domestic
product in financial year 2013. The markets reflected the RBI's stance almost
immediately -- the benchmark Sensex at the Bombay Stock exchange (BSE) fell more
than 100 points. The rupee fell to 55.57 against the dollar after having touched
a day's high of 55.27 earlier in the day. The RBI was expected to bring down the
repo rate by at least 0.25-percentage point to 7.75 percent, and the Cash Reserve
Ratio (CRR) by up to 1 percentage point. Earlier this year, the RBI, in a radical
departure from its 20-month rate hike spree, had reduced the CRR by 125 bps and
the repo rate by 50 bps. Following the latest GDP numbers, which showed that economic
expansion has hit a nine-year low at 6.5 per cent in last fiscal, there have been
incessant calls from the government as well as economists to give growth concerns
a priority over the inflation.
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