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RBI Holds Key Rates, Cuts Growth Forecast

27 January, 2009

The Reserve Bank of India left its short-term rates and banks’ cash reserve requirements unchanged on Tuesday as it waited to gauge the impact of its aggressive easing since mid-October to stem a sharp economic downturn.

Fiscal measures to shore up the economy against the global downturn would sharply widen the federal government’s fiscal deficit, the Reserve Bank of India said in its quarterly policy review.

It also cut its forecast for economic growth in the current fiscal year to 7.0 percent “with a downward bias” from an estimate of 7.5-8.0 percent in October, bringing it broadly in line with recent government and market predictions.

Wholesale price inflation was projected to fall below 3 percent in annual terms by the end of the fiscal year in March.

“There is now distinct evidence of further slowdown as a consequence of the global downturn,” the Reserve Bank said.

The central bank left its lending rate steady at 5.5 percent and its reverse repo rate , at which it absorbs surplus cash from the banking system, unchanged at 4.0 percent.

It has also kept the cash reserve ratio, the amount of funds banks have to keep on deposit with it, unchanged at 5.00 percent.

“The response to the Reserve Bank’s policy actions over the last several months is still unfolding,” the central bank said. 

The central bank said the federal budget would be under pressure from several factors. Slowing growth would lower tax collections while stimulus measures, subsidies, a pay rise for civil servants and a farm debt waiver had added to spending.

“Additional expenditure coupled with foregone revenue would raise the fiscal deficit from the budget estimate of 2.5 percent to at least 5.9 percent of GDP,” the central bank said.

Earlier this month, it slashed its short-term rates by 1 percentage point and cut the cash reserve requirement by half a point as Asia’s third largest economy struggled to weather the onslaught of the global slowdown.

There are signs of faltering demand in the economy, which grew by 9 percent or more over the last three fiscal years, as high borrowing costs at home and recessions in key markets have spoiled appetite for goods and services.

Prime Minister Manmohan Singh’s Economic Advisory Council said last week said expansion would slow to 7.1 percent for the current fiscal year to end March, from a previous estimate of 7.7 percent.

Many private sector economists are more pessimistic. In a quarterly poll carried out by Reuters in December, economists expected economic growth to ease to 6.8 percent in 2008/09, its slowest pace in six years.

The bank rate, used by banks to price long-term loans, remained at 6.0 percent.

The Reserve Bank was tipped to hold interest rates steady, but a sizeable minority of analysts polled by Reuters had bet on yet another cut, a Reuters poll showed last week.

The RBI has cut its short-term lending rate by 350 basis points in four steps since Oct. 20 as the global financial crisis hurt business sentiment and reduced demand.


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RBI Holds Key Rates, Cuts Growth Forecast

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