India’s central bank left its key interest rate unchanged yesterday, resisting growing pressure from New Delhi to kick-start growth even as it slashed its growth forecast and raised its inflation projection for Asia’s third-largest economy.
Though the Reserve Bank of India (RBI) left the policy rate at 8.0 percent, it did trim the cash reserve ratio by a quarter of a point, to 4.25 percent, effective on Saturday. It said this would inject 175 billion rupees into a cash-constrained banking system, which should improve the flow of credit and help rekindle growth.
RBI again slashed its growth outlook for the year ending March, from 6.5 percent to 5.8 percent. Its initial projection was 7.3 percent. The bank said headline inflation would likely hit 7.5 percent in March, up from an earlier forecast of 7.0 percent — and far above the bank’s medium-term target of 3.0 percent.
RBI has been under growing pressure from New Delhi and business leaders to cut interest rates as growth slipped to its lowest levels since 2009, but the bank says inflation remains its “primary focus.”
“Managing inflation and inflation expectations must remain the primary focus of monetary policy,” the bank said in its quarterly policy statement yesterday.
The bank said that containing inflation would contribute to consumer and investor confidence, both key to sustaining growth in the medium term.
The RBI said the economy is still mired by stalled investment, weakening consumption and falling exports.
It said there is a “reasonable likelihood of further policy easing” in the January to March quarter, provided inflation eases and New Delhi’s ambitious reform agenda gets translated into action.
Indian Finance Minister Palaniappan Chidambaram on Monday announced an ambitious fiscal consolidation plan, which was widely seen as prompt by New Delhi for a rate cut.
Chidambaram said India’s fiscal deficit would be 5.3 percent for the year ending March, up from a budgeted 5.1 percent, before falling 0.6 percentage points a year to hit 3.0 percent by fiscal 2017.
He said the current account deficit would narrow to 3.7 percent of GDP, or US$70.3 billion, in the year ending March, from 4.2 percent of GDP (US$78 billion) the prior year.
The government, he added, is confident that the current account deficit would be fully financed through capital inflows.
However, Chidambaram’s fiscal plan came in for criticism as vague and unrealistic, and the RBI’s statement cast into further doubt some of the finance ministry’s assumptions.
The RBI said yesterday that from April through August, the fiscal deficit was nearly two-thirds of the entire year’s budget, cautioning that the fiscal deficit is “expected to be higher than budgeted.”
The bank also noted the risk of volatile capital flows, and said that given current global economic uncertainty, financing a large current account deficit “poses challenges.”
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