RBI governor Subbarao sees scope to cut interest rates in 2012

MUMBAI: The Reserve Bank of India has scope to cut interest rates during this calendar year, Governor Duvvuri Subbarao said in a news conference after the central bank's policy review, though he declined to elaborate further.

Subbarao said fiscal measures from the government would not necessarily prompt the central bank to take monetary policy action.

Earlier in the day, the Reserve Bank of India left interest rates unchanged citing inflationary pressures, but cut the statutory liquidity ratio by a percentage point to 23% to increase the flow of credit to industry.

RBI kept its policy repo rate at 8 per cent and left the cash reserve ratio for banks at 4.75 per cent. CRR is the share of deposits banks must keep with the RBI.

"In the current circumstances, lowering policy rates will only aggravate inflationary impulses without necessarily stimulating growth," RBI Governor Duvvuri Subbarao wrote in the monetary policy review, adding the central bank's primary focus remains inflation control.

Although there is no cut in key repo rate, the rate at which it lends to banks, or even a cash reserve ratio, the proportion of deposits that bank keep with RBI, lowering of SLR could bring down market interest rates as it would release close to Rs. 55,000 crores into the sytem.

SLR cut will "maintain liquidity to facilitate smooth flow of credit to productive sectors to support growth," RBI Subbarao wrote in the review. "In the current circumstances, lowering policy rates will only aggravate inflationary impulses without necessarily stimulating growth. As the multiple constraints to growth are addressed, the Reserve Bank will stand ready to act appropriately.

The central bank raised the year end inflation forecast to 7%, from 6.5% as deficient monsoon and high international crude prices may push prices up, RBI governor Duvvuri Subbarao said. The central bank indicated that the Wholesale price index (WPI) has been sticky above levels of 7%. "Non-manufactured inflation has not declined and serious supply side constraints remain," the bank said in a statement. Subbarao emphasised that the RBI's primary focus is to manage inflation.