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| RBI Credit Policy: Rates Unchanged | | | Agencies
Mumbai, July 28: The Reserve Bank on Tuesday kept the key rates unchanged and said there are progressive signs of economic recovery but warned that the overall scenario continued to be uncertain with fiscal consolidation posing a challenge.
In its quarterly review of the monetary policy, the Reserve Bank while keeping the repo and reverse repo — shot-term rates at which banks lend and borrow from RBI — retained economic growth projection at 6 per cent with an upward bias in current fiscal.
The policy, in line with the expectations of the bankers, however, said that there are progressive signs of recovery with increased food stocks, positive industrial production and optimistic business confidence.
However, it added, there are some negative signs like delayed and deficient monsoon, food price inflation, rebound in global commodity prices, continuing weak external demand and high fiscal deficit.
RBI expects inflation to scale up to around five per cent by March 2010.
"On balance, the risks to the current projections of real GDP growth and inflation for 2009-10 are on the upside," RBI said.
It kept the bank rate - the lending rate at which banks borrow from RBI-- unchanged at 6 per cent. Short-term lending (repo)and borrowing (reverse repo) have been retained at the same level of 4.75 per cent at 3.25 per cent respectively.
Cash reserve ratio-- the percentage of amount banks are required to park with the apex bank -- is also kept unchanged at 5 per cent.
Warning that the large fiscal deficit, now pegged by the government at 6.8 per cent of GDP, if continued beyond the recovery period, can crowd out private investment and trigger inflationary pressures, RBI said, adding that the Government will need to return to the path of fiscal consolidation .
"This requires a roadmap and focus on quality of fiscal adjustment even while pursuing quantitative targets," RBI said.
The second challenge is to manage the government’s borrowing programme for 2009-10, it said, adding, the central bank will meet the challenges of spurring private credit demand by maintaining policy rates and liquidity conditions conducive.
Turning to inflation, the apex bank, said the transitory negative WPI may not persist beyond a few more months.
As a result, with uncertain monsoon and rising global commodity prices inflation is projected at around 5 per cent by March, 2010. This is higher than the projection of 4 per cent made in the annual policy statement, RBI said.
The monetary policy efforts should be to ensure price stability so as to keep inflation in the range of 4-4.5 per cent with a medium term of objective of 3 per cent.
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