The Reserve Bank of India is keeping its key repo rate and cash reserve ratio (CRR) unchanged, despite expectations for a cut, to dampen inflationary expectations despite the economic slowdown.
Economist had expected the RBI to trim rates after growth in the fourth quarter dropped to a nine-year low. The RBI kept the policy repo rate at 8 percent and the CRR at 4.75 percent.
The RBI acknowledged the pressure for it to lower rates, but said a "further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures."
The RBI cut its repo rate by 50 points and the CRR by 1.25 percentage points in April, a move the RBI described as "front loading the policy rate reduction."
The RBI said the debt problem in the euro area continues to weigh on the global economy, but if there was "an event shock, central banks in advanced economies will likely do another round of quantitative easing. This will have an adverse impact on growth and inflation in EDEs (emerging and developing economies), particularly oil importing countries such as India, through a possible rebound in commodity prices."
But the RBI is concerned about inflationary expectations after provisional data showed that inflation rose to 7.6 percent in May from 7.2 percent in April, mainly due to food and fuel prices.
"Notwithstanding the moderation in core inflation, the persistence of overall inflation both at the wholesale and retail levels, in the face of significant growth slowdown, points to serious supply bottlenecks and sticky inflation expectations."
Click for full RBI statement.
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