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India's growth outlook has 'weakened' says central bank India bank holds interest rates but boosts liquidity
(about 3 hours later)
India's central bank said the outlook for the Indian economy has weakened more than expected but inflation remains high, ahead of an interest rate decision. India's central bank has left interest rates unchanged but moved to increase liquidity as it battles high inflation and the prospect of weaker growth.
The Reserve Bank of India (RBI) has raised benchmark rates 13 times since March 2010 to curb consumer prices. The Reserve Bank of India (RBI) pointed to the government's "policy and administrative uncertainty" as one of the reasons for the economic problems.
Inflation rose at 7.47% in December, which despite being a two-year low is still well above government targets. It earlier cut its prediction for economic growth for the financial year to March from 7.6% to 7%.
These factors are "complicating policy choices" the href="http://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=25835" >bank said. The bank has raised benchmark rates 13 times since March 2010 to curb prices.
"Monetary actions will need to strike a balance between risks to growth and inflation," the RBI said. Inflation rose at 7.47% in December which, despite being a two-year low, is still well above government targets.
Growth concernGrowth concern
The RBI has said that domestic growth has been hit by a number of factors. In a strongly worded statement, the RBI said: "The global environment is only partly responsible for the weak industrial performance and sluggish investment activity.
"Growth in 2011-12 is moderating more than was expected earlier," the bank said. "Several domestic factors - the unhealthy fiscal situation, high interest rates and policy and administrative uncertainty - are also playing a role.''
"The business climate has weakened. The slack in investment and net external demand may keep the pace of recovery slow in 2012-13." It added: "Policy and administrative actions, which induce investment that will help alleviate supply constraints in food and infrastructure, are critical.
It also warned of spillover from Europe and the slowing global economy. "In the absence of credible fiscal consolidation, the Reserve Bank will be constrained from lowering the policy rate in response to decelerating private consumption and investment spending."
"With growth decelerating even in emerging and developing economies, the spillovers from euro area are likely to pull down global growth." The bank announced a 50 basis point cut in banks' cash reserve ratio. This reduces the amount of money they are required to hold and is intended to stimulate lending.
And while inflation has been moderating, which could allow monetary policy space to focus on spurring growth, the bank called this a "temporary respite". As much as 320bn rupees ($6.4bn) could be released into the banking system.
The bank said it remained confident inflation would ease to 7% by March.
ING Vysya Bank economist Upasna Bhardwaj told Associated Press that the moves were largely expected but that the RBI's hands were tied on the supply side.
"The government has to do something,'' she said. "Huge fiscal expenditures are adding to the inflation scenario.''
In its earlier report, the RBI said that domestic growth had been hit by a number of factors.
"With growth decelerating even in emerging and developing economies, the spillovers from the euro area are likely to pull down global growth."