Weighed down by a weak rupee, the Reserve Bank of India, RBI, on Tuesday chose to keep all key interest rates unchanged and asked the government to take urgent steps to reign in the high current account deficit.
Lowering the GDP growth projection for the current fiscal to 5.5 % from 5.7 %, the central bank said the external sector is the "biggest threat" to economic stability.
It also said that the recent liquidity tightening measures, taken to support the rupee, will be rolled back in a calibrated manner as stability is restored to the foreign exchange market, enabling it to revert to the policy of supporting growth with continuing vigil on inflation.
The RBI will endeavour to keep inflation, which is under threat from a depreciating rupee, at 5 % by March end.
"The policy stance is guided by the need for continuous vigil and preparedness to pro-actively respond to risks to the economy from external developments, especially those stemming from global financial markets," RBI governor D Subbarao said in what would be his last policy announcement unveiled here.
Accordingly, the repo rate or the rate at which RBI lends to the system, has been retained at 7.25 % and the cash reserve ratio, the amount of deposits banks park with RBI, has been kept unchanged at 4 %.
Giving the policy guidance, the governor said, "Monetary policy going forward will be shaped by the consideration of supporting growth, anchoring inflation expectations and maintaining external sector stability."