RBI leaves key rates unchanged; cuts growth forecast

Mumbai, July 30 (IANS) The Reserve Bank of India (RBI) Tuesday left all key policy rates unchanged to support the battered rupee and said the recent liquidity tightening measures will be rolled back when stability returns to the currency markets.

In the first quarter review of the monetary policy, the central bank cut growth forecast for the current financial year to 5.5 percent from its earlier projection of 5.7 percent, saying continued domestic as well as global uncertainties would hit the Indian economy.

The repurchase or the repo rate, the interest that commercial banks pay to the RBI on short-term borrowings, has been left unchanged at 7.25 percent. And so has the reverse repo rate at 6.25 percent.

The cash reserve ratio (CRR), or the share of deposits banks must keep with the central bank, is also maintained at 4 percent.

"India is currently caught in a classic 'impossible trinity' trilemma whereby we are having to forfeit some monetary policy discretion to address external sector concerns," said RBI Governor D. Subbarao.

He said the liquidity tightening measures taken by the central bank over the last two weeks were aimed at checking undue volatility in the foreign exchange market.

"They will be rolled back in a calibrated manner as stability is restored to the foreign exchange market, enabling monetary policy to revert to supporting growth with continuing vigil on inflation."

Reacting on the RBI policy, chief economic adviser in the finance ministry Rajan said the government and the central bank were on the same page and working together to ensure stability in the currency markets.

"Government and the Reserve Bank of India are firmly convinced of the need to do what it takes to stabilise the rupee, and we see this as being friendly to growth over the medium term," Rajan said in a statement.

"No one should doubt our resolve in this matter," he said.

The RBI move dampened the sentiments in equities as well as currency markets.

The rupee slipped below the key psychological level of 60 against a dollar and hit a three-week low.

Key indices of the Indian stock markets hit the lowest level in one month. The Bombay Stock Exchange benchmark index Sensex slumped 1.25 percent at 19,348.34 points and the National Stock Exchange's Nifty fell 1.31 percent at 5,755.05 points.

Explaining the RBI move, the Governor said while the investment climate remained weak and risk aversion continued to stall fresh plans, the outlook was also inhibited by cost and time overruns, deteriorating cash flows and lack of credit confidence.

Subbarao said while in the past couple of years, the central bank's stance was to address the twin issues of growth and inflation, the situation now has exacerbated with concerns over external sector, mainly on account of the current account deficit.

"The current situation -- moderating wholesale price inflation, prospects of softening of food inflation consequent on a robust monsoon and decelerating growth -- would have provided a reasonable case for continuing on the easing stance," he said.

Analysts said the central bank's move was on expected line as it had little room to tinker with the rates, given the volatility in the currency markets.

"RBI has made it very clear that it can only contain the volatility of the rupee, it can support the government in growth of the economy but the kick has to come from the government," said Siddharth Shankar, advisor, broking and investment firm KASSA.

Confederation of Indian Industry (CII) president Kris Gopalakrishnan said the moderation of growth outlook by the RBI is a matter of great concern.

"This enforces our view that actions on multiple fronts are required to help the economy revive, besides a large number of policies needing implementation," Gopalakrishnan said.

The Federation of Indian Chambers of Commerce and Industry (FICCI) secretary general, A. Didar Singh said the RBI decision was on expected line.

"The decision of the central bank to hold back cut in the repo rate was anticipated as the entire focus at present seems centered on supporting the rupee. However, we cannot lose sight of the fact that industrial growth remains worrisome," Didar Singh said.