RBI keeps all key rates unchanged

The Reserve Bank also lowered the growth forecast for 2007-08 to 8.5 % and promised to keep the inflation close to 5 %.

The Reserve Bank of India on 24 April 2007 left key short-term borrowing rates unchanged as it seeks to keep economic growth on track despite inflation running well above its comfort zone.

The RBI’s decision had been widely expected following a series of rate hikes but significantly, the central bank also tweaked its inflation target slightly lower, suggesting it remains ready to tighten policy if need be.

The RBI has raised short-term lending rates twice this year, by a quarter of a percent each time to 7.75% — the highest level in more than four years — to contain inflation running above six%.

It had previously aimed for an annual inflation rate of 5.0-5.5% but said in a regular quarterly review that the earlier rate hikes should help to being price rises down towards the lower end of that range.

“In view of the lagged and cumulative effects of monetary policy on aggregate demand, the policy would be to contain inflation close to 5.0% ” in the fiscal year started April 1, RBI Governor Y.V. Reddy said in a statement.

India grew 9.2% last year but the RBI said it would slow to 8.5% this year because of the steps taken since 2004 to cool what it termed “an overheating economy.”

“The bank has taken a swift response with appropriate measures to all situations, impinging on inflation expectations and growth momentum,” the RBI said.

Inflation picked up to 6.09% in the first week of April from 5.74% the previous week as prices for food and other items such as fuel and building materials put a strain on production capacity in the country of 1.1 billion.

One analyst said the rate hikes and a tightening in commercial bank reserve requirements in recent months do seem to have slowed demand somewhat, with credit now growing at a more moderate if still fast pace.

“With recent measures, credit growth has fallen from 30% to 20% ,” said Bidisha Ganguly, chief economist with brokerage BRICS Securities.

Analysts had expected the central bank to keep rates on hold in the latest review but some said demand may not have slowed as much as the RBI hopes and tighter monetary policy may be on the horizon.

More “hikes are likely” later this year if inflation remains higher than forecast,“ said Rajeev Malik, Asia economist with JP Morgan Chase in Singapore.

Source : Livemint