India Keeps Interest Rate Unchanged


The Reserve Bank of India has kept interest rates unchanged, but decreased reserve requirements, as the economic growth is falters under weakened global demand.

Statement from the Reserve Bank of India

Since the beginning of 2012, monetary policy has been aimed at maintaining monetary conditions in line with the objective of containing inflation, while ensuring that liquidity conditions remain supportive of recovery. In this direction, the Reserve Bank used the available space to support growth by lowering the cash reserve ratio (CRR) by 150 basis points on a cumulative basis, the statutory liquidity ratio (SLR) by 100 bps, the repo rate by 50 basis points and infusing over `1.7 trillion of liquidity through outright open market purchases. As a result, liquidity in 2012 so far has stayed in line with policy objective. Going forward, there is a need to calibrate monetary policy factoring in the evolving growth-inflation dynamics as also the progress that may be made in containing the twin deficits.
 
Growth in Q3 is likely to have stayed low with no perceptible signs of improvement from the preceding quarter. Saving and investment rates have declined in recent years, pushing the economy’s potential growth rate down to about 7 per cent. The reform measures announced since mid-September 2012 can help improve growth subject to quick implementation. As the policy environment, pace of clearances for projects and input supplies improve, the drag of stalled infrastructure investment on growth would decline.
 
Inflation has stayed sticky at around 7.5 per cent in 2012 so far. Non-food manufacturing inflation has not softened in spite of the negative output gap that has emerged as a result of slowing growth. Fiscal imbalances past exchange rate depreciation and feeble supply response have impacted inflation. Going forward, inflation is likely to remain sticky in near months, but some relief may follow as demand-side inflationary pressures ebb after a period of high wage and cost push inflation.
 

Reserve Bank of India | Andre Crujo | andre@tradingeconomics.com
12/11/2012 5:07:01 PM