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RBI Credit Policy leaves key rates unchanged

This article was posted on Jul 28, 2009 and is filed under Market News

NEW DELHI: The RBI has kept the key rates unchanged and increased the inflation forecast to 5 per cent. The GDP is expected to grow at 6 percent and the money supply growth is seen at 18 per cent, according to the quarterly review of the economy, released on Tuesday. ( Watch )

The deposit growth is seen at 19 per cent and the review has said that there is scope for the banks to cut interest rates. The SLR also remains unchanged at 24 per cent.

“It is worth reiterating that the Reserve Bank will maintain an accommodative monetary stance until there are definite and robust signs of recovery,” it said in its review.

“The overall macroeconomic scenario continues to be uncertain although it is expected that the fiscal and monetary stimulus measures will boost domestic demand in 2009/10. On balance an uptrend in the growth momentum is unlikely before the middle of 2009/10,” the central bank said in its quarterly statement.

The repo rate, at which the central bank lends cash to banks, stays at 4.75 per cent, which is its lowest in 9 years, and the reverse repo rate, at which it absorbs surplus cash from the banking system, stays at 3.25 per cent, according to the Q1 Monetary Policy.

The RBI has cut its short-term lending rate by 425 basis points in six steps since October to support growth. The RBI also slashed the reverse-repo rate by 275 basis points since early December and brought down the cash reserve requirement by 400 basis points to 5 percent to keep credit flowing. This has resulted in injection of over Rs 5,61,700 crore into the economy.

In its quarterly review of the economy released on Monday, the central bank said there were indications of inflation firming up by the end of the year due to increases in commodity prices, easy monetary policy and expansionary fiscal policy.

Asia’s third-largest economy grew 6.7 percent in the last fiscal year ended March after expanding by 9 percent or more in the previous three years. Private sector economists expect growth between 5.8 and 7.2 percent this year. At its April review, the RBI forecast growth of 6 percent in 2009/10.

Wholesale prices are below last year’s levels, largely as a result of oil prices retreating from their all-time peaks reached in July 2008. But they have been rising since March as food and oil prices have started to creep up, while consumer price inflation hovers near 8 percent.

India’s fiscal deficit is on track to reach 6.8 percent this year, its highest level in 16 years, with the government set to borrow a record 4.51 trillion rupees ($94 billion) in 2009/10, roughly three times last year’s borrowing.

The RBI urged a return towards fiscal consolidation. “Large fiscal deficits if continued strictly beyond the recovery period, can crowd out private investment and trigger inflationary pressures,” it said.

source: Economic times
The bank rate, used by banks to price long-term loans, remained at 6.0 percent.

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