RBI keeps policy rates unchanged

Reserve Bank of India (RBI) kept policy rates unchanged in its mid-quarter monetary policy review announced today. Accordingly the cash reserve ratio (CRR), or the portion of deposits scheduled banks have to place with the central bank, will remain unchanged at 4.0 per cent of their net demand and time liabilities.
 
The policy repo rate – the rate at which banks borrow from the RBI under the liquidity adjustment facility (LAF) - is also unchanged at 7.25 per cent.

Consequently, the reverse repo rate or the interest the RBI pays banks on their CRR under the LAF, will remain unchanged at 6.25 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 8.25 per cent, RBI said in a release today.

''The monetary policy stance has been influenced by the evolving growth-inflation dynamic, the balance of risks as well as recent developments in the external sector, RBI said.

RBI said since its last policy review in May, global economic activity has slowed and risks to the domestic economy remained high, especially on account of uncertainty over policies of ''systemic central banks.''

Sluggish external demand and stalled domestic investment are dragging down economic activity in the country. Inflation has also been easing in the advanced economies due to weak demand conditions.

On the other hand, emerging economies, with the exception of China, present a mixed picture with inflation remaining elevated.

Domestic macroeconomic conditions also remain weak, hamstrung by infrastructure bottlenecks, supply constraints, lacklustre domestic demand and subdued investment sentiment.

While inflation has moderated, upside pressures on the way forward from the pass-through of rupee depreciation, recent increases in administered prices and persisting imbalances, especially relating to food, pose risks of second-round effects.

Any shift in global market sentiment can trigger a reversal of capital from a broad swath of emerging economies, including India, amplifying risks to the outlook, RBI said.

India's GDP grew at a slow pace of 4.8 per cent in the fourth quarter of the 2012-13 fiscal, a marginal improvement over the previous quarter.

During the current financial year, the growth of industrial production decelerated to 2.3 per cent in April after picking up in the preceding month. All constituent categories of industry have slowed, with a persistent contraction in mining activity. The sharp weakening in the growth of capital goods production points to still damped investment demand whereas a pick-up in consumer non-durables could be indicative of a fragile return of consumer confidence.

On the other hand, the services sector purchasing managers' index rose in May on order flows. The onset of the south-west monsoon has been strong and on time.

Net average daily borrowings of banks under the LAF have declined gradually, from Rs1,20,000 crore in March 2013 to Rs70,000 crore in June 2013 so far (up to June '14) reflecting the sizable injection of primary liquidity, RBI noted.

RBI said it has injected enough liquidity through the reduction in the cash reserve ratio (CRR) in January, open market operations (OMO) purchases during Q4 of 2012-13, a significant reduction in the government's cash balances with the RBI as well as two OMOs of Rs20,000 crore in the current financial year so far.

RBI said there is an urgent need to reverse the continuing weakness in manufacturing activity, and 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.