Reserve Bank of India Leaves Rates on Hold

Reserve Bank of India decided on July 30th to leave the repo rate unchanged at 7.25 percent, to support the rupee and citing increasing risks to growth outlook.
Reserve Bank of India | Joana Taborda | 7/30/2013 10:41:09 AM
While the onset of the monsoon and its spread have been robust, the persisting weakness in industrial activity has heightened the risks to growth. Moreover, global growth has been tepid, with consequent adverse spillovers on India’s exports, manufacturing and services. The growth projection for the current year is revised downwards, from 5.7 per cent to 5.5 per cent. 

Risks to growth have increased notwithstanding the robust onset and spread of the monsoon. Industrial production has slumped, with lead indications of declining order books and input price pressures building on rupee depreciation. Meanwhile, depressed global conditions are undermining export performance, even as heightened volatility in capital flows has raised external funding risks. Wholesale price inflation pressures are on the ebb, but retail inflation remains high.

Keeping in view the domestic demand-supply balance, the outlook for global commodity prices and on the expectation that the spatial and temporal distribution of the monsoon during the rest of the season will be normal, the Reserve Bank will endeavour to condition the evolution of inflation to a level of 5.0 per cent by March 2014, using all instruments at its command.

The foreign exchange market came under severe stress starting May, prompting the Reserve Bank to institute liquidity tightening measures to contain the volatility. The recent measures by the Reserve Bank to restore stability to the foreign exchange market should be used as a window of opportunity to put in place policies to bring the CAD down to sustainable levels.

Over the last one year, the Government has taken several policy initiatives to improve the investment environment. As these initiatives work through the system and are further built upon, the current slowdown can be reversed, returning the economy to a higher growth trajectory. The Reserve Bank will have to ensure that the economy traverses that high growth trajectory in an environment of price stability and financial stability.

Monetary policy going forward will be shaped by considerations of supporting growth, anchoring inflation expectations and maintaining external sector stability.

Reserve Bank of India Leaves Rates on Hold