India's central bank holds interest rates, growth forecast

The Indian central bank on Tuesday kept its short-term lending and borrowing rates unchanged, in line with expectations, balancing its policy action between a comforting, 7.4 percent economic growth for the second quarter of this fiscal and a creeping inflation.

In its fifth bi-monthly monetary policy review of the current fiscal conducted by Reserve Bank of India Governor Raghuram Rajan here, the repurchase rate at which short-term credit is extended to commercial banks was left unchanged at 6.75 percent.

Accordingly, the reverse repurchase rate, or the interest paid by the central bank for short-term borrowings, also stood frozen at 5.75. percent. The statutory liquidity ratio and cash reserve ratio that banks have to keep in liquid assets and government securities also remained intact.

The Reserve Bank of India also kept its overall growth projection for 2015-16 at 7.4 percent and said the inflation target of 6 percent in January next year as set out in the previous policy update also was within reach, albeit with a slight downside risk.

Soon after the monetary policy update, the sensitive index (Sensex) of the Bomay Stock Exchange and the Nifty of the National Stock Exchange (NSE) took a slight dip, but stabilised thereafter, as investors felt the pronouncements were on expected lines.

Rajan, who expressed concern over farm growth and retail inflation, remained neutral on services sector and saw some ray of hope with a pick up in factory output growth, said: "We're seeing an economy that is well and truly in recovery, but with areas of concern."

The governor also sought once again to nudge the commercial banks to cut interest rates.

He said since January, when the RBI started cutting its lending rates and easing its monetary policy stance, less than half of the cumulative policy repo rate reduction of 125 basis points has been passed on by commercial banks.

"The median base lending rate has declined only by 60 basis points," Rajan said. "The government is examining linking small savings interest rates to market interest rates. These moves should further help transmission of policy rates into lending rates," he added.

At the same time, Rajan alluded that there was no plan to tighten the policy stance.

"We're still accommodative and that is clear. We're also vigilant," Rajan told a press conference soon after unveiling the policy update when asked if there was a change of stance in the RBI's outlook.

"The Reserve Bank will use the space for further accommodation, when available, while keeping the economy anchored to the projected disinflation path that should take inflation down to 5 per cent by March 2017."