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Wednesday , December 19 , 2012
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Status quo on rates

Mumbai, Dec. 18: Christmas may be round the corner, but the RBI is in no mood to dole out the lollies just yet.

The central bank today decided not to cut key policy rates, but held out strong hopes for an interest rate cut in January even as it signalled that the monetary policy focus would now shift towards supporting growth.

“In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards,” the RBI said.

The Indian economy has stuttered to its slowest GDP growth in the past decade of 5.4 per cent in the first half ended September, prompting the government to cut its growth forecast for this fiscal to anywhere between 5.7 per cent and 5.9 per cent.

In its mid-quarter review of the monetary policy, the RBI left the repo rate and the cash reserve ratio (CRR) unchanged at 8 per cent and 4.25 per cent, respectively. The repo is the rate at which the RBI provides funds to banks, while CRR is the portion of their deposits that banks must maintain with the RBI.

Ahead of the monetary policy, only a few expected RBI governor Duvvuri Subbarao to cut interest rates. The central bank has flagged inflation-busting as its pre-eminent objective but hasn’t been able to bring it down to its comfort range of around 5 per cent.

Inflation as measured by the wholesale price index had moderated to 7.24 per cent in November. Significantly, core (non-food manufactured products) inflation had also softened. These factors had kindled hopes of a repo rate cut.

However, many had anticipated that the central bank would only cut CRR by 25 basis points as liquidity conditions had been tight.

However, there was disappointment on both counts as these key rates were untouched. The RBI said one of the major reasons for opting for status quo was the elevated consumer price inflation.

“In striking contrast to wholesale inflation developments, retail inflation remained elevated. The new combined (rural and urban) CPI inflation increased in November, reflecting sustained food inflation pressures, particularly in vegetables, cereals, pulses, oils and fats. The non-food component of the index also suggested persistent inflationary pressures,” the RBI said.

Though key policy rates had not been altered, many were pleased with the RBI’s guidance. The apex bank indicated that there could be an interest rate cut as early as January and said it would also ensure that there was adequate liquidity in the system.

Montek favours cuts

The Planning Commission today joined industry in its demand for a rate cut by the RBI to boost growth, which is beginning to look up after moderating to 5.4 per cent in the first half of this fiscal.

“The RBI has decided to take no action. The economy is beginning to turn around. Everybody should support the revival in growth,” plan panel deputy chairman Montek Singh Ahluwalia said.

Commerce minister Anand Sharma said, “We were hoping that after major decisions taken by the government, which has boosted investors’ morale and confidence, the RBI will be less conservative.”

Industry today asked the RBI to cut rates before its January 29 policy review.

“We hope that the RBI will not wait for the next quarterly review, but will recognise the enormity of the problem and intervene sooner than that,” CII director-general Chandrajit Banerjee said.

“With inflation showing a decline and the global economy still in a difficult situation, industry is crying out for an impetus for investment and growth. Lower interest rates will be oxygen to the sentiment, which is turning positive,” Ficci president Naina Lal Kidwai said.