India: Central Bank remains on hold despite slowing economy
August 23, 2012
At its last policy meeting on 31 July, the Reserve Bank of India (RBI) left the repo rate unchanged at 8.00% and the reverse repo rate at 7.00%, in a decision widely expected by the market. The Bank also left the cash reserve ratio unchanged at 4.75%. According to the RBI, global macroeconomic conditions have deteriorated and most of the world economy is now in a synchronised slowdown. Domestically, recent data from the industrial sector points to a slowdown in economic activity; furthermore, a deficient and uneven monsoon is hurting growth prospects. Regarding price developments, the Bank noted that, despite a recent moderation, price pressures persist due to both exchange rate movements and supply side constraints. In addition, international crude prices remain elevated, putting additional pressure on domestic fuel prices. Against this backdrop of slowing growth and high inflation, the RBI judged appropriated to leave interest rates unchanged, as inflation remains well above the comfort zone of the Reserve Bank. The RBI maintained a rather hawkish stance, adding that the challenge for monetary policy is to maintain its commitment to firmly containing inflation and lowering inflation expectations.