RBI Mid-Quarter Monetary Policy Review

Key Policy Rates Unchanged

The Reserve Bank of India kept the repo rate and the cash reserve ratio (CRR) unchanged despite inflation easing for three successive months to 4.7 percent from 7.4 percent last year and all categories of industry particularly mining slowing down. In the Mid-Quarter Monetary Policy Review, the RBI has put the onus of stimulating growth on the government noting that the manufacturing activity needs to be urgently reversed. The apex bank said, the key to growth is accelerating investment by creating a conducive environment or private investment, improving project clearance and implementing and leveraging on the crowding-in role of public investment. HIGHLIGHTS Key short term lending rate (repo rate) kept unchanged at 7.25 pc. Cash reserve ratio too unchanged 4 percent. Rupee fall, external sector risks and elevated food inflation areas of concern. Continuing weakness is manufacturing needs to be urgently reversed. RBI asks govt. to create conductive environment for private investment, improve project clearances to promote growth. Durable receding of inflation will open space for monetary policy action. Reducing CAD is a challenge; RBI pitches for stable foreign inflows to finance it. Steps of curb gold imports, easing commodity prices to lower CAD in 2013-14 Balance of payments, inflation and growth rate to determine future monetary stance. Need to be vigilant about global uncertainly and its impact on capital flows. RBI ready to use all available instruments to deal with any adverse development in external sector. Positive rating action should have favorable impact on investor confidence.

Key Concept Repo Rate: The rate at which RBI lends to commercial banks. Reverse Repo Rate: The rate at which RBI borrows from commercial banks. Cash Reserve Ratio: The share of deposits bank must keep with RBI.

-2Clearly implying that interest rates were not the factor hampering growth, the RBI further noted that the economy was hamstrung by infrastructure bottlenecks supply constraints, lackluster demand and subdued investment sentiment. The RBI said that inflation had moderated but emphasized that hidden inflation in the form of further increase in administered prices, the weakening rupee and continuing food inflation pose risk. The Reserve Bank also said there were risks of sudden shifts in global market sentiment that could trigger sudden stop and reversal of capital from the emerging economies.

(Compilation by Anurag Misra, Chief Editor)