The Reserve Bank of India (RBI) on Monday left its main lending rate unchanged, defying widespread demand for a rate cut, and placed on the government the onus of arresting a slide in the broader economy hit by policy logjam, an uncertain global economy and fractious politics.
RBI kept the repo rate — the rate at which its lend to banks-unchanged at 8% and also maintained the cash reserve ratio (CRR) or the portion of deposits banks have to park with the central bank, at 4.75%.
It argued that a cut in interest rates will only help fan inflation that has been climbing back to worrisome levels in recent months.
Wholesale price inflation was 7.55%, while consumer prices inflation, a more realistic metric of cost of living, stood at 10.36% in May.
“Further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures,” said D Subbarao, governor, RBI.
Domestic businesses have been pressuring the central bank for a rate cut, blaming high borrowing costs for slowing investment that has pulled down growth. But RBI contested the view on Monday.
“Estimates suggest that real effective bank lending interest rates, though positive, remain comparatively lower than the levels seen during the high growth phase of 2003-08.” Thus, it implied that factors other than interest rates were contributing more significantly to the growth slowdown.
Reacting to the announcement, the 30-share Bombay Stock Exchange (BSE) Sensex, which was trading 200 points up in initial trade, fell 244 points or 1.4% to close at 16706, while the rupee fell 51 paise to close at 55.93 against dollar.
“Our assessment of the current growth-inflation dynamic is that there are several factors responsible for the slowdown in activity, particularly in investment, with the role of interest rates being relatively small,” said Subbaro.The central bank said that evolving growth-inflation dynamic will continue to influence the Reserve Bank’s stance on interest rates. "Future actions will depend on a continuing assessment of external and domestic developments that contribute to lowering inflation risks," said the governor.