India's Reserve Bank Keeps Rates Unchanged Amid Inflationary Risks


The RBI decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 7.25 per cent and to keep the cash reserve ratio of scheduled banks unchanged at 4.0 per cent of their net demand and time liabilities. The Central Bank warned of upward risks to inflation posed by a falling rupee and increases in food prices.

In its decision to leave monetary policy unchanged, the Reserve Bank evoked the evolving growth-inflation dynamic, the balance of risks as well as recent developments in the external sector. Since the RBI’s annual policy statement in May, global economic activity has slowed and risks remain high, most recently on account of uncertainty over policies of systemic central banks. On the domestic front, macroeconomic conditions remain weak, hamstrung by infrastructure bottlenecks, supply constraints, lacklustre domestic demand and subdued investment sentiment. Inflation has moderated as projected. However, upside pressures on the way forward from the pass-through of rupee depreciation, recent increases in administered prices and persisting imbalances, especially relating to food, pose risks of second-round effects. 

Easing commodity prices at the global level and weaker pricing power of corporates at the domestic level are having a softening influence on inflation. Given that food price changes remains high, the inflation outlook will be influenced by concerted efforts to break food inflation persistence. The inflation outlook going forward will be determined by suppressed inflation being released through revisions in administered prices, including the minimum support prices as well as the recent depreciation of the rupee.

Recent measures to dampen gold imports are expected to moderate the current account deficit in 2013-14 from its level last year. The main challenge is to reduce the current account deficit to a sustainable level; the near-term challenge is to finance it through stable flows.

The Reserve Bank’s monetary policy stance will be determined by how growth and inflation trajectories and the balance of payments situation evolve in the months ahead. It is only a durable receding of inflation that will open up the space for monetary policy to continue to address risks to growth.

India


RBI | Nuno Fontes | nuno@tradingeconomics.com
6/17/2013 9:38:40 AM