MUMBAI — The Indian central bank left interest rates unchanged Tuesday for the second consecutive review, showing that pulling down stubbornly high inflation is its top priority, even as economic conditions deteriorate.
Underlining its policy problem as it faces pressure to reduce rates, Reserve Bank of India, the central bank, cut its economic growth forecast for the fiscal year ending next March, while at the same time raising its inflation forecast.
The central bank left its policy repo rate at 8 percent and cash reserve ratio for banks at 4.75 percent. The repo rate is the discount rate at which a central bank repurchases government securities from the commercial banks, while the cash reserve ratio is the share of deposits banks must keep with the central bank.
“In the current circumstances, lowering policy rates will only aggravate inflationary impulses without necessarily stimulating growth,” the bank’s governor, Duvvuri Subbarao, wrote in the monetary policy review. The central bank’s primary focus remains inflation control, he said.
The central bank’s hard line on rates contrasts with the stances of many other central banks that are easing credit conditions to try to bolster economies feeling the effects of the euro zone crisis.
The policy maintains pressure on the government of Prime Minister Manmohan Singh to rein in subsidy spending and take other steps to bolster an economy growing at its weakest pace in almost a decade.
A Reuters poll of 20 economists last week showed all but one expected the bank to hold rates steady.
Many economists expected the bank to resume cutting rates only in the second half of the fiscal year that ends in March, and modestly at that.
“Given the inflationary risks and pressures, which I don’t see going away, we will continue to see high inflation in the rest of the year,” said Abheek Barua, chief economist at HDFC Bank in New Delhi.
Wholesale price inflation remained above 7 percent in June and consumer price inflation was 10 percent.
On Tuesday, the central bank cut its economic growth outlook for the fiscal year to 6.5 percent, from the 7.3 percent assumption made in April, putting its outlook closer to that of many private-sector economists.
It also raised its headline inflation projection for March 2013 to 7 percent from 6.5 percent in its April review, further reducing market hopes for action in the near term to ease interest rates.
The central bank unexpectedly cut the minimum requirement for banks’ government bond holdings to 23 percent of deposits from 24 percent, an effort to free up cash. However, some bankers said the cut was unlikely to lead to more lending, given worries about deteriorating credit quality in the slowing economy.