By IANS
New Delhi : India's central bank Tuesday kept its key lending rate unchanged along predictable lines, but increased the minimum cash banks have to retain against deposits in a bid to curb liquidity and contain inflation.
After the first review of the monetary and credit policy announced in April, the Reserve Bank of India (RBI) said the cash reserve ratio was being raised by 50 basis points to seven percent – the highest in six years – from Aug 4.
It also left intact at six percent the reverse repurchase rate, or the interest paid to suck money out of the system, as also the key bank rate at six percent and the repurchase rate, or the short-term interest rate, at 7.75 percent.
The central bank also decided to scrap the afternoon, second session of money market operations with effect from Aug 6. The central bank normally holds such operations twice a day.
Despite the robust economic growth of 9.4 percent in the previous year, the RBI retained its earlier projection of 8.5 percent growth for the current fiscal and said the price rise will be contained below five percent.
"There are indications that a strong momentum of activity has been sustained in the Indian economy in the early months of 2007-08," RBI Governor Y.V. Reddy said while unveiling the policy review.
"While the growth in industry and services has accelerated in recent years, the stagnation in productivity levels of major crops and the overall volatility of agriculture output have emerged as issues of serious policy concern," he added.
"It is in this context that the Planning Commission has targeted a growth rate of four percent per annum in the agricultural sector, which is necessary not only to ensure food security but also to enable inclusive growth."
The inflation rate based on wholesale prices has been pulled down to 4.4 percent from 5.9 percent in March, but the central bank warned that pressures on the price line remained, warranting a vigilant and proactive monetary policy.
"Holding headline inflation within five percent in 2007-08 assumes priority in the policy hierarchy while reinforcing the medium-term objective to condition policy and perceptions to reduce inflation to 4-4.5 percent," Reddy said.
"Recent financial market developments in India and potential uncertainties in global markets warrant a higher priority in the policy hierarchy for managing appropriate liquidity conditions at the current juncture."
Reacting to the policy review, the Associated Chambers of Commerce and Industry (Assocham) said the policy did not prescribe adequate measures to stop the rupee from further appreciating, which would hurt exporters' sentiments.
"It excessively focuses on taming inflation rather than fuelling growth," chamber president Venugopal N. Dhoot said in a statement.
In a similar vein, the Confederation of Indian Industry (CII) said in the tight monetary regime, small and medium enterprises would find it difficult to access funds, since effective rates and availability of credit were an issue for them.
The industry lobby expressed the hope that if commodity prices came down further over the next few months, the central bank would not wait till the next review Oct 30 to indicate a softening of its stance on the monetary policy.