Mumbai, Oct. 30: The Reserve Bank of India (RBI) today cut the cash reserve ratio (CRR) by 25 basis points to 4.25 per cent but resisted pressure from the North Block to trim the repo rate as well because of mounting concerns over inflation.
The CRR increase will inject an additional Rs 17,500 crore into the financial system, but it isn’t enough to quell a growing clamour from industry for a rate cut to re-ignite a faltering economy.
The CRR is that portion of deposits that banks must maintain with the RBI. It is a monetary tool that RBI governor D. Subbarao has used for the fourth time since January 28 even as he struggles to strike a balance between the compulsions of tamping down on inflation currently riding at around 7.5 per cent and hauling the economy out of the rut. GDP growth in the first quarter ended June 30 slowed to 5.5 per cent, sparking fears of a “slowflation”.
Inflation is now forecast to touch 7.5 per cent by the end of March next year — half a percentage point higher than the projection made in June.
The decision to hold the rate–signalling repo at 8 per cent left finance minister P. Chidambaram and industry moguls fuming as the economy lumbers into a slowdown. Admitting that the economy had slowed down, the RBI governor also slashed the GDP growth forecast to 5.8 per cent this year from an earlier estimate of 6.5 per cent.
Subbarao tried to mollify his critics by suggesting that a “further policy easing” – read a rate cut – was likely in the fourth quarter (January-March 2013).
The rate cut promise rang a little hollow as Subbarao worked a caveat into the guidance by suggesting that the easing would be “conditioned by the growth-inflation dynamic”. It was the sort of semantic sand-bagging that one has come to expect from the RBI governor who has often been accused of being a maverick among the world’s central bankers, preferring to run in a different direction from the herd.
In Delhi, finance minister P. Chidambaram said grimly: “Growth is as much a challenge as inflation. If government has to walk alone to face the challenge of growth, then we will walk alone.”
Subbarao has often said the monetary policy will focus on slaying inflation first before it starts adopting growth-inducing measures. He has often been critical of the government’s inability to come to grips with the fiscal deficit and force the pace on reforms to revive the economy.
Chidambaram was apparently upset over the RBI’s decision to leave interest rates unchanged on inflation concerns even though the government had unveiled a five-year fiscal consolidation road map ahead of today’s monetary policy review. The government aims to halve fiscal deficit to 3 per cent by March 2017.
“Sometimes it is best to speak, and sometimes it is best to remain silent. This is the time for silence,” Chidambaram said.
“Industry is disappointed that the key policy rate has not been reduced. The focus continues to be on managing inflation with growth continuing to suffer,” Assocham president Rajkumar Dhoot said.
The Sensex tumbled 204.97 points to close at 18430.85 as investors pummelled stocks to express their disappointment over the RBI’s refusal to rejig rates.
At his press conference in the afternoon, Subbarao defended his decision to stand firm on interest rates. “A rate cut will not help if liquidity is tight. Conversely, even if there is comfortable liquidity, it will not help if rates are high,” he added.
“We have to carefully calibrate both the CRR and repo rate. Looking at the current balance between growth and inflation risks, we thought it is appropriate to maintain the policy rate where it is just a little bit above the inflation rate,” he said.
Subbarao added that as risks to growth had increased, the RBI did not want tight liquidity to push interest rates higher. The CRR cut is expected to ensure that demand for credit at the current policy rate and at the current interest rate structure is fully met and thereby help ease the supply constraints that the economy faces.
The RBI said inflation had inched up in September because of the revision in diesel and electricity prices. However, the underlying inflationary pressures in non-food manufactured products remain above comfort levels. Inflation could inch up again over the next three months.
Subbarao said the first and second round impact of inflation because of the revision in electricity rates was estimated at around 60 basis points. Of this, 34 basis points have been absorbed until September.
The full impact of the diesel price hike is estimated at 110 basis points, but the price index has only captured 40 basis points till now.
The RBI said inflationary pressures were also anticipated from the rise in rural and urban wages that was unaccompanied by an increase in productivity.
“It is critical that even as the monetary policy stance shifts further towards addressing growth risks, the objective of containing inflation and anchoring inflation expectations is not de-emphasised,” the central bank said.