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The Reserve Bank of India kept its policy repo rate at 8 per cent and the cash reserve ratio at 4.75 per cent at its latest policy meeting.This comes after the central bank’s 50 basis point cut at its April meeting, and despite hopes of another rate cut against a backdrop of slowing domestic growth.
Fitch cut the nation’s credit ratings, and S&P warned that India could be reduced to junk status citing concerns about the country’s political hurdles and its growth prospects.
The central bank cited inflation as being a risk, with retail inflation “on an uptrend”:
“The Reserve Bank had frontloaded the policy rate reduction in April with a cut of 50 basis points. This decision was based on the premise that the process of fiscal consolidation critical for inflation management would get under way, along with other supply-side initiatives. Our assessment of the current growth-inflation dynamic is that there are several factors responsible for the slowdown in activity, particularly in investment, with the role of interest rates being relatively small. Consequently, further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures.”
With its latest policy decision, the central bank passed the responsibility of stimulating growth on to India’s coalition government, but said it “stands ready to use all available instruments and measures to respond rapidly and appropriately to any adverse developments.”