The Reserve Bank kept interest rates unchanged giving priority to checking inflation over growth, disappointing India Inc and retail borrowers who were expecting at least 0.25 percent rate cut.

Besides, the central bank also kept cash reserve ratio (CRR) or the percentage of deposits that banks have to keep with RBI unchanged at 4.75 percent.

RBI, in its mid-quarterly review of the monetary policy said the future action would depend upon on external factors, domestic developments and inflationary risks.

“Future actions will depend on a continuing assessment of external and domestic developments that contribute to lowering inflation risks,” RBI said on Monday.

Stock markets fell sharply after having opened high in the morning on rate cut hopes.

However, after the RBI policy announcement, the BSE 30-scrip index, Sensex, fell by over 200 points to below 17,000-mark it had crossed in the morning trade.

Experts were expecting the Reserve Bank to cut the lending rate (repo) by at least 0.25 percent and were also looking forward to further cut in CRR to infuse more liquidity in the financial system.

While the short term lending rate has been kept unchanged at 8 percent, CRR remains at 4.75 percent.

In order to help export sector, RBI has raised limit of export credit refinance from 15 percent of outstanding export credit of banks, to 50 percent.

This will further augment liquidity and encourage banks to increase credit flow to the export sector, RBI said.

The decision will potentially release additional liquidity of over Rs 30,000 crore, equivalent to about 0.5 percent of reduction in the CRR, RBI said.

Countering the argument that high interest rate has been the reason behind the record dip in growth, RBI said the real effective bank lending rates are still lower than the high growth period of 2003-2008.

“This suggests that factors other than interest rates are the contributing more significantly to the growth slowdown,” it said.

The cautious stance comes at a time when pressure has been mounting on the Mint Road mandarins to do something to revive the sagging growth and boost sentiment, which dipped to a nine-year low of 5.3 percent for three months ending March.

The GDP growth for the fiscal 2011-12 also plunged to 6.5 percent, lower than the 6.7 percent reported during the peak of post-Lehman collapse credit crisis.

Bankers, led by the country’s largest lender State Bank of India, were rooting for a cut in CRR saying it will help in quicker transmission while a slew of think-tanks and analysts were expecting a 0.25 percent cut in repo rates, given the dismal growth data.

In its guidance, RBI said the policy will be guided by the evolving growth-inflation dynamics, with an eye on the external and domestic development that contribute to lowering inflation risks.

RBI said management of liquidity is a key concern and it will continue buy government bonds.

On the rupee fall, it said this should make the country’s exports competitive overtime and act as a demand stimulus.

The political inability to pass on elevated crude prices to consumers is resulting in a widening of the current account deficit, and will end up crowding out investment at a time when encouraging investment is imperative from the growth perspective, RBI said.

On the troublesome economic situation globally, it said the evolution of the euro-zone crisis which has a bearing on the capital inflows, will be a factor to look out for.

Between March 2010 and October 2011, RBI had cut repo rates a record 13 times, by 350 basis points, in its battle against inflation.

After a gap of three years, on 17th April 2012, RBI had slashed short term lending rate by 0.50 percent to 8 percent.

It had indicated in the last policy action in April that its space to cut rates further was difficult.

Following are the highlights of the ‘Mid-Quarter Monetary Policy Review: June 2012’ announced by the Reserve Bank on Monday:

* No change in key policy rates

* Inflationary pressure still high

* Higher export refinance limit to release Rs 30,000 crore

* Global economic conditions have deteriorated since April

* Domestic economic situation raises several concerns

* Factors besides high rates more responsible for slowdown

* Rupee slide offset impact of fall in crude oil on inflation

* Sticky inflation points to serious supply bottlenecks

* Oil subsidy crowding out public investment

* Slowing capital flows will have adverse impact on India

RBI enhances export credit refinance limit; injects Rs 30K cr

The Reserve Bank has decided to enhance the Export Credit Refinance (ECR) limit to 50 percent of the outstanding rupee export credit for banks, from 15 percent, a move that will inject Rs 30,000 crore into the system.

“With a view to enhancing the credit flow to the export sector, it has been decided to enhance the eligible limit of the ECR facility for scheduled banks (excluding RRBs) from 15 per cent of the outstanding export credit eligible for refinance to 50 per cent, effective fortnight beginning June 30, 2012,” RBI said in its mid-quarterly policy review on Monday.

This will provide additional liquidity support to banks of over Rs 30,000 crore, the apex bank said.

The interest rate charged on the ECR facility is equivalent to the repo rate, which is currently 8 percent.

The move of the RBI would provide some kind of leeway to the bank to borrow up Rs 30,000 crore.