RBI keeps key lending rates unchanged

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SME Times News Bureau | 18 Jun, 2012
In a bid to control high inflation, the Reserve Bank of India (RBI) Monday kept key lending rates unchanged, but said it is ready to provide relief in a turbulent global economic situation.

"Management of liquidity remains a priority. Even as the liquidity situation converges to the comfort zone, the Reserve Bank will continue to use open market operations (OMOs) as and when warranted to contain liquidity pressures," the apex bank said in a statement.

"Recognising that the global situation is turbulent, the Reserve Bank stands ready to use all available instruments and measures to respond rapidly and appropriately to any adverse developments."

The apex bank further said that since the last rate cut, global macroeconomic indicators have deteriorated and that the headline inflation numbers are far above the comfort range.

"Since the RBI's annual policy statement in April, global macroeconomic and financial conditions have deteriorated. At the same time, the domestic macroeconomic situation too raises several deepening concerns."

By not cutting rates, the apex bank has shown resistance to the pressure that was being built on it to cut rates. The pressure was emanating out of recent data which showed that the economy is facing low growth.

However, the RBI cited that inflation continues to remain very high and much above the comfort level.

"While growth in 2011-12 has moderated significantly, headline inflation remains above levels consistent with sustainable growth. Importantly, retail inflation is also on an uptrend," the apex bank said.

Food inflation re-entered the double-digit zone after a gap of six months in April 2012 and the trend continued in May.

Food inflation rose to 10.74 percent in May as compared to 8.25 percent in the previous month as vegetables, pulses, milk, eggs, meat and fish became costlier, pinching the pockets of common people.

The overall inflation moved up to 7.55 percent in May as compared to 7.23 percent in the previous month.

To tackle inflation, the central bank raised its key lending rate 13 times since March 2010 but began reversing the rate cycle by cutting the repo rate (short-term lending rates) by 50 basis points in April.

The re-purchase rate remains unchanged at eight percent, which automatically keeps the reverse re-purchase rate at seven percent.

The re-purchase rate is the interest the Reserve Bank levies on short-term borrowings by commercial banks. The reverse re-purchase rate is the interest on short-term lending.

A cut in these rates would have reduced the cost of accessing funds for lending institutions. It would have also eased money supply in the financial system by making it more attractive for commercial banks not to park their funds with the RBI in the form of government securities, and instead lend it for commercial purposes.

In April, RBI Governor Duvvuri Subbarao cut re-purchase rate by 50 basis points to 8 percent, which automatically impacted the reverse re-purchase rate which dropped to 7 percent from 7.5 percent.