The Reserve Bank of India (RBI) on Tuesday withstood mounting pressure from industry bodies to cut interest rates but signalled that it would start reducing lending costs from January amid signs that prices have begun cooling.
The RBI, in its mid-quarter review, kept the repo rate and the
cash reserve ratio (CRR) unchanged at 8% and 4.25% respectively. The RBI uses the repo rate to stymie demand and cool prices. A high repo will dissuade banks from slashing lending rates to final consumers.
A rate cut in its next quarterly review appears likely.
“Overall, recent inflation patterns and projections provide a basis for reinforcing our October guidance about policy easing in the fourth quarter ( January to March),” RBI governor D Subbarao said in a statement.
The growth in the index of industrial production (IIP) — the closest approximation for measuring economic activity in the country’s business landscape — jumped sharply in October primarily aided by led by 9.6% growth in manufacturing and 16.5% in consumer durables.
The RBI, however, was guided more by trends on the price front and also on the low probability of sustainability of the recent industrial growth. The fact that automobile sales slumped again in November to 1.3% versus 13% in October supports the view that the jump in consumer durables growth may not be sustainable.
The headline wholesale prices index (WPI)-based inflation edged down to 7.2 % in November, owing to softening of prices of vegetables, minerals and fuel. However, in striking contrast to wholesale inflation developments, retail inflation remained elevated.
At 9.9% in November, overall consumer price inflation — a more realistic cost-of-living measure as it captures shop-end prices — is again nudging uncomfortably closer to double digits. In RBI’s views, this reflects “sustained food inflation pressures”.
“The RBI is closely monitoring the evolving growth-inflation dynamic and will update the formal numerical assessment of its growth and inflation projections for 2012-13 as part of the third quarter review in January 2013,” it said.
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