India's central bank Tuesday left all key policy rates  untouched to calm currency markets that saw a sharp depreciation of the rupee in recent months, while conceding that risks to growth have increased and retail inflation remained high.

 

The repurchase, or the repo rate, which is the interest the Reserve Bank of India (RBI) pays for short-term borrowings from commercial  banks, has been left unchanged at 7.25 percent, so has the reverse repo, or short-term lending rate, which is at 6.25 percent.

 

The cash reserve ratio (CRR), or the share of deposits banks must keep with the central bank, is also maintained at 4 percent.

 

The decisions were taken in the first quarter review of the bank's monetary policy for the current fiscal, conducted by RBI Governor D. Subbarao, who said: "By far, the biggest risk to the macroeconomic outlook stems from the external sector."

 

The governor also said while the investment climate remained weak and risk aversion continued to stall fresh plans, the outlook was also inhibited by cost and time overruns, deteriorating cash flows and lack of credit confidence.

 

Subbarao said while in the past couple of years, the central bank's stance was to address the twin issue of growth and inflation, the situation now has exacerbated with concerns over external sector, mainly on account of current account deficit.

 

"The current situation moderating wholesale price inflation, prospects of softening of food inflation consequent on a robust monsoon and decelerating growth — would have provided a reasonable case for continuing on the easing stance," the governor said.

 

"However, India is currently caught in a classic `impossible trinity' trilemma, whereby we are having to forfeit some monetary policy discretion to address external sector concerns."

 

On the central bank's part, Subbarao said, the recent liquidity-tightening measures were aimed at checking undue volatility in the foreign exchange market, but would be rolled back in a calibrated manner.

 

For that, stability has to be restored to the foreign exchange market, enabling monetary policy to revert to supporting growth with continuing vigil on inflation, he said, in a nudge to the government to play its part as well.

 

"It should be emphasised that the time available now should be used with alacrity to institute structural measures to bring the current account deficit down to sustainable levels."

 

 –Indo-Asian News Service