RBI keeps interest rates unchanged, signals downward trend

With inflation remaining high, the Reserve Bank on Thursday kept the interest rate unchanged for now, but made a promise that cost of borrowing will come down in future.

Amidst expectations of a pause in tight monetary policy, RBI Governor D Subbarao gave a firm signal that no further hardening of interest rates is required.

However, the timing and the quantum of rate cuts will be determined by inflation, he said unveiling the mid-quarterly review of the credit policy, a day before the Union Budget.

The benchmark policy interest rate (repo rate) at which RBI lends to banks has been kept unchanged at 8.5%. The cash reserve ratio, the portion of deposits banks need to keep with RBI, has been retained at 4.75%. But this rate was reduced only on March 10 by 0.75 percentage points to infuse Rs48,000 crore in the system to ease liquidity.

"Recent growth-inflation dynamics have prompted the RBI to indicate that no further tightening is required and that future actions will be towards lowering the rate.

"However, notwithstanding the deceleration in growth, inflation risks remain, which will influence both the timing and magnitude of future rate actions," Subbarao said, adding that suppressed prices of fuel, fertiliser and power pose risk to inflation in the economy.

The RBI said the upside risks to inflation have increased from the recent surge in crude oil prices, fiscal slippages in government finances and rupee's appreciation.

Inflation rose to 6.95% in February which is much above the Reserve Bank's comfort level of 5-6%.

RBI said while there is a slowdown in economy, the GDP growth in the last quarter of the current financial year is expected to be better than the previous three-month period.

The RBI policy, along with political uncertainty, dampened investor sentiment with BSE benchmark Sensex plunging over 240 points at mid-day.