Disappointing widespread expectations in the market, the Reserve Bank of India today left its key rates unchanged. The RBI kept the policy repo rate unchanged at 8 per cent and left the cash reserve ratio (CRR) at 4.75 per cent.
"Further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures," the RBI wrote in its mid-quarter policy review.
Indian bond prices and stocks dropped while the rupee weakened against the dollar after the RBI's unexpected decision to hold rates steady.
Repo is the rate at which banks borrow money from RBI. This is a reference rate used by banks to lend to their customers. CRR is the portion of deposits that banks must keep with the central bank.
The central bank last cut its repo rate in April, when it reduced the policy rate by a larger-than-expected 50 basis points or 0.5 per cent. The RBI said today that it had ''frontloaded'' the cut in April in expectations that the government would seek to bring about fiscal consolidation, vital to check inflation, but this had not happened.
Global and domestic economic conditions have deteriorated sharply over the last few months, driving expectations for a cut in repo rates and CRR. However, RBI governor D Subbarao had less room for manoeuvre after May benchmark inflation rose to 7.55 per cent, the highest among industrialised countries and the BRIC group of Brazil, Russia, India and China.