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Falling Rupee, Rising Inflation Force RBI To Retain Key Rates

JULY 30, 2013

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Troubled by a weak rupee, the Reserve Bank has kept all key interest rates unchanged and also asked the government to take urgent steps to check the high current account deficit. Lowering the GDP growth projection for the current fiscal to 5.5% from 5.7%, the central bank has termed the external sector the "biggest threat" to economic stability.



The RBI will roll back in a phased manner the recent liquidity tightening measures, taken to support the rupee, as stability comes back to the foreign exchange market. The RBI will try to keep inflation, currently threatened by a falling rupee, at 5% by March end.



The policy view is guided by the need for continuous preparedness to respond to the economic from external developments stemming from global financial markets. It would also endeavour to manage liquidity conditions to ensure adequate credit flow to productive sectors of the economy. Accordingly, the repo rate has been retained at 7.25% and the cash reserve ratio, the amount of deposits banks park with RBI, has been kept unchanged at 4%.


The current low headline inflation, chances of softening food inflation and slowing growth warranted a pro-growth policy, but the difficulties on the external front, as reflected in the almost 10 %  rupee depreciation and the rising current account deficit prevented it.


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