Mumbai, April 24: The RBI today left its benchmark interest rates unchanged, refrained from tweaking its cash reserve requirement for banks and signalled its intention to cap inflation at 5 per cent this year.
The pause on rate hikes was largely anticipated, but the absence of inflation-busting measures indicated that the central bank did not want to precipitate a slowdown in the economy, which grew 9.2 per cent last year. It forecast that the economy would grow 8.5 per cent in 2007-08.
Unveiling the annual policy statement here, Reserve Bank governor Yaga Venugopal Reddy left the repurchase rate or repo — a benchmark overnight lending rate — unchanged at 7.75 per cent, while the cash reserve ratio was maintained at 6.5 per cent. The bank rate remained unchanged at 6 per cent, and the reverse repo at 6 per cent.
“The policy is a continuation of the stance maintained by the RBI in the last review, and the central bank will act swiftly to deal with the situation (that may arise). But at the moment there is no need to tinker with the rates,” Reddy told reporters at a press conference shortly afterwards.
“What the RBI has done today is broadly in line with the government’s thinking,” finance minister P. Chidambaram said in New Delhi. “These steps will moderate inflation without affecting growth.”
Bankers had been expecting some measures to check dollar inflows to stop the rupee from appreciating, but the central bank refrained from doing so, prompting the local currency to spike to another nine-year high at Rs 41.18.
Other markets reacted positively to the announcements, with the sensex clambering 208 points to 14,136.72, while the yield on the 10-year bond slid 11 basis points to 7.99 per cent — the lowest since March 29.
M. Balachandran, chairman of the Bank of India, said the status quo on interest rates would see the bond market going up, while the overnight index swap rates would drop by about 7 to 10 basis points.
Inflation remains the biggest bugbear for the central bank, and the RBI signalled as much when it indicated that its medium-term goal was to prune it to 4 to 4.5 per cent from the earlier target of 5 per cent.
Bankers felt that the hawkish tone on inflation indicated that the rate hikes could come sooner rather than later in the year. “After evaluating economic growth over a period of six months, I won’t be surprised if Reddy announced further monetary tightening measures,” said Neeraj Swaroop, CEO of Standard Chartered Bank’s Indian operations.
While lowering the growth forecast to 8.5 per cent, the RBI said monetary expansion should be contained at around 17 to 17.5 per cent down from over 20 per cent last year. It also wanted to see non-food credit growth decelerate to 24 - 25 per cent from the average of 29.8 per cent over the four-year period between 2004 and 2007.
The central bank took some measures to control capital inflows, particularly from non-resident Indians. It trimmed the interest rate ceiling on FCNR(B) dollar deposits by 50 basis points, that is to Libor minus 75 basis points.
The RBI chose to allow more domestic outflows by permitting individuals to spend or invest up to $100,000 a year overseas and raised the limit on mutual fund investments abroad to $4 billion from $3 billion earlier. The central bank also gave firms permission to pre-pay $400 million of their external commercial borrowings without having to seek its approval.
“Allowing Indian companies to invest up to three times their net worth overseas, and raising the overseas portfolio investment limit to 35 per cent are landmark decisions and will encourage Indian companies to expand abroad. The move to lower the non-resident deposit rates will, however, discourage inflows, thus moderating total capital inflow within the country,” said Crisil’s principal economist D.K. Joshi.
Industry welcomed the central bank’s decision not to adopt measures that would trammel growth but hoped that India Inc would not face trouble in obtaining credit. Habil Khorakiwala, president of Ficci, said, “Hopefully, the RBI will not take harsh measures to hit credit offtake.”
R Seshasayee, president of the CII, said any further increase in borrowing costs would affect demand in a big way.