India: Central Bank keeps rates unchanged and focuses on external sector
July 30, 2013
At its 30 July monetary policy meeting - the last chaired by Duvvuri Subbarao - the Reserve Bank of India (RBI) left the repurchase rate unchanged at 7.25%, a move widely expected by the market. The RBI also maintained the cash reserve ratio at 4.00%. The Bank's decision to leave interest rates unaltered follows the liquidity tightening measures taken by monetary authorities on 15 July in an aim to smooth volatility in the foreign exchange market.
According to the RBI, economic activity weakened in the first quarter of the fiscal year 2013/2014. Monetary authorities also indicated that recent data suggest that sluggish growth will continue in manufacturing and in services. On a positive note, the Bank underlined that the monsoon, "arrived on time," and that rainfall has continued longer than expected. Regarding price developments, the Bank warned that the rupee's sharp depreciation is likely to fuel inflation in the coming months.
Against a backdrop of weak economic growth and higher inflation pressures, the Central Bank reiterated that the current monetary policy stance continues, "to address the heightened risks to growth, to guard against the re-emergence of inflation pressures and to manage liquidity conditions to ensure adequate credit flow to the productive sector of the economy." The Bank also added to the above-mentioned policy goals, pointing out that it will, "address the risks to macroeconomic stability from external shocks."
The majority of FocusEconomics Forecast panellists expects the RBI to cut the repo rate in the months ahead, resulting in an average forecast of 7.06% by the end of fiscal year 2013/14.
Author: Ricardo Aceves, Senior Economist