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«AgroInvest» — News — India Central Bank Refrains From Rate Cut

India Central Bank Refrains From Rate Cut

2013-06-17 15:40:20

India's central bank decided to keep its key interest rates steady as a weak currency and the huge current account deficit limited room for another rate cut.

At the mid-quarter review on Monday, the Reserve Bank of India, led by Governor Duvvuri Subbarao, maintained the repo rate at 7.25 percent and the reverse repo rate at 6.25 percent.

The repo rate is the rate at which the central bank lends to banks and the reverse repo rate is the rate at which it accepts deposits from banks. The central bank has reduced these key rates thrice this year to revive the flagging economic growth.

The RBI also maintained its cash reserve ratio, or CRR, at 4.00 percent. The bank last slashed the CRR by 25 basis points in January.

Capital Economics India Economist Aninda Mitra said a rate cut now would have weakened India's ability to attract the capital it needs to finance its current account deficit, at a time when investor sentiment has anyway been turning against the emerging world.

The bank expects softer global commodity prices and measures to curb gold imports to moderate the current account deficit in 2013-14. According to the RBI, the main challenge is to reduce the current account deficit to a sustainable level.

Mitra expects only one more 25 basis point rate cut in 2013, toward the end of the year.

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

Further, the bank said it stands ready to use all available instruments and measures to respond rapidly and appropriately to any adverse developments.

The wholesale price inflation slowed to the weakest in a three-and-a-half-years in May, to 4.7 percent. The RBI says the inflation outlook will be influenced by concerted efforts to break food inflation persistence.

While distribution of rainfall over the next three months is set to determine the performance of agriculture, the bank said, the continuing weakness in manufacturing activity needs to be urgently reversed.

The economy logged the slowest growth in a decade in the fiscal year 2012-13, at 5 percent. However, any reduction in interest rates could be a blow to inflation and current account financing amid rupee trading near record lows.

The RBI said it is only a durable receding of inflation that will open up the space for monetary policy to continue to address risks to growth.

 

 

 

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