EMIs to remain high as RBI keeps policy rates unchanged

Mumbai, June 17 (IANS) The Reserve Bank of India (RBI) Monday kept key policy rates unchanged, after lowering them in each of its three previous monetary policy reviews, and warned that the rupee's weakness and rise in administered prices, for instance of diesel, could fuel inflation.

In its mid-quarter review of the monetary policy for 2013-14, the central bank kept the repo rate, the rate at which the RBI borrows money from the commercial bank, unchanged at 7.25 percent. The reverse repo rate was adjusted to 6.25 percent.

These policy adjustments determine lending and deposit rates by the commercial banks. The status quo meant the equated monthly installments (EMIs) for home and auto loans would remain at an elevated level.

The cash reserve ratio (CRR), or the share of deposits banks must keep with the RBI, was kept unchanged at 4 percent.

The RBI maintained the status quo despite moderation in inflation. The central bank said the recent weakness of the rupee and possible increase in administered prices could fuel inflationary pressure.

"The inflation outlook going forward will be determined by suppressed inflation being released through revisions in administered prices, including the minimum support prices as well as the recent depreciation of the rupee," RBI Governor D Subbarao said in the policy review.

Chairman of Prime Minister's Economic Advisory Council C. Rangarajan said the RBI had taken a cautious stand largely influenced by external factors and current account deficit.

"The current account deficit is high and more recently the rupee has been under pressure. This appears to have been a major factor influencing the RBI to pass this stand," Rangarajan said, while reacting on the RBI monetary policy.

The central bank said easing commodity prices at the global level and weaker pricing power of corporates at the domestic level are having a softening influence on inflation.

"Given that food inflation remains high, the inflation outlook will be influenced by concerted efforts to break food inflation persistence," the RBI said.

According to data released by the commerce and industry ministry last week, the country's headline inflation based on the Wholesale Price Index (WPI) fell to 4.7 percent in May, the lowest in 43 months, against 4.89 percent in April and 7.55 percent in the corresponding month of last year.

Retail inflation based on the Consume Price Index (CPI) declined to 9.3 percent in May as compared to 10.2 percent in the previous month.

The central bank said the monetary policy stance would be determined by how growth and inflation trajectories and the balance of payments situation evolve in the months ahead.

"While several measures have been taken to contain the current account deficit, we need to be vigilant about the global uncertainty, the rapid shift in risk perceptions and its impact on capital flows," it said.

On growth, the central bank said the key to "reinvigorating growth is accelerating investment by creating a conducive environment for private investment, improving project clearance and implementation and leveraging on the crowding-in role of public investment".

Industry leaders expressed disappointment over the status quo as they had been pushing for rate cuts to revive investments.

"The decision of the RBI to hold policy rates on status quo is disappointing. At a time when both growth and inflation dynamics call for an accommodative monetary policy, the RBI has taken a cautious approach of attending to the prospect of a possible resurgence in inflation over reviving growth in the economy," said Chandrajit Banerjee, director general, Confederation of Indian Industry (CII).

President of the Federation of Indian Chambers of Commerce and Industry (FICCI) Naina Lal Kidwai, however, said the RBI decision was not totally unexpected.

"With some of the earlier concerns like inflation, negative IIP growth slowly receding, and performance of the monsoon being reassuring, the situation does appear to be improving and it is hoped that investment is in high focus as it needs a boost to trigger growth," Kidwai said.

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