Giving no respite to the aam admi as EMIs for housing and car loans would remain unchanged, the academician-turned-central banker Raghuram Rajan and Governor of the Reserve Bank of India has maintained a status quo on the key policy rate while targetting inflation in its first bi-monthly monetary policy statement on Tuesday.
The RBI has left the short-term lending rate, or repo rate, unchanged at 8 per cent and the cash reserve ratio static at 4 per cent. It has, however, halved the overnight call money rate to 0.25 per cent and increased the 7-day and 14-day repo limits to 0.75 per cent from 0.50 per cent.
“At the current juncture, it is appropriate to hold the policy rate, while allowing the rate increases undertaken during September 2013-January 2014 to work their way through the economy,” said RBI Governor Raghuram Rajan.
For the first time since taking over in September, Rajan did not surprise the markets and kept rates unchanged, as predicted.
“Excluding food and fuel...Retail inflation remained sticky around 8 per cent. This suggests that some demand pressures are still at play,” the Governor said.
If inflation continues along the glide path of reaching 8 per cent by January 2015 and 6 per cent by the year after, the Governor promised there won’t be any rate hikes.
According to bankers, interest rates are likely to remain unchanged and there will be no immediate impact on EMIs.
“Interest rates are likely to stay where they are now for some time. life would be as usual for some time to come,” Punjab National Bank Chairman and Managing Director KR Kamath said.
The RBI pegged 2014-15 GDP growth at a central estimate of 5.5 per cent. It said the FY14 current account deficit would be about 2 per cent of GDP. To rein in inflation, Rajan raised the repo rate three times since September by 0.25 per cent each for a total of 75 basis points.
In the previous policy review in January, the RBI increased the key rate by 0.25 per cent to 8 per cent. Rajan said lead indicators do not point to any sustained revival in industry and services as yet and the outlook for the agricultural sector is contingent on the timely arrival and spread of the monsoon.
The RBI will continue to monitor liquidity conditions and ensure adequate flow of credit to the productive sectors. “liquidity conditions have tightened in March, partly on account of year-end ‘window dressing’ by banks, though an extraordinary infusion of liquidity by the Reserve Bank has mitigated the tightness,” he said.
The Reserve Bank will propose measures to reduce such practices, he added. Emphasising that revival of growth should be the number one priority for the RBI at this time, industry groups said RBI’s apprehensions about inflation rearing its head again may prove to be misplaced.
“At a time when growth impulses remain weak and WPI inflation has been on the declining trajectory, the RBI should have taken this opportunity to announce a cut in policy rates, which would stimulate demand and kick-start the investment cycle,” CII Director General Chandrajit Banerjee said.
“Tweaking policy rates downwards would help lift business sentiments. We feel relying primarily on monetary policy for inflation management may not be a comprehensive approach. There are administrative fixes and fiscal measures that need to be adopted,” Ficci President Sidharth Birla said.
“The RBI had the opportunity to give growth a chance to reinvigorate by reducing the policy interest rates and reviving the investor sentiment,” Assocham President Rana Kapoor said.
“The RBI status quo on policy rates is disappointing as the industrial growth is severely impacted by high cost of funds and other structural rigidities in the economic system like poor infrastructure and high transaction costs,” said Sharad Jaipuria, President of the PHD Chamber.
If inflation continues along the glide path of reaching 8 per cent by January 2015 and 6 per cent by the year after, RBI Governor Raghuram Rajan said there won’t be any rate hikes.
“The exporting community was looking towards the RBI to reduce the policy interest rates. Thus, we are disappointed,” EEPC India Chairman Anupam Shah said.
The RBI pegged GDP growth in 2014-15 at 5.5 per cent. It also said the current account deficit in FY14 would be about 2 per cent of GDP.
The RBI has also forewarned that the impact of the El Nino weather phenomenon on the monsoon which could in turn have an adverse bearing on inflation. Other risks to inflation are uncertainty on minimum support prices for agricultural commodities and other administered prices, especially of fuel, fertiliser and electricity, the outlook for fiscal policy, geo-political developments and their impact on global commodity prices.
The Bank has also allowed overseas investors to hedge their currency exposure. In order to enhance hedging facilities for foreign investors in debt instruments, RBI proposed to allow them to hedge the coupon receipts falling due during the next 12 months.
“This is determined by improving the hedging environment for foreign investors in India. It is not necessarily to combat the NDF market but primarily to improve the (hedging) environment in the country,” said Rajan after the policy anncouncements.
The central bank also said it is in final discussion with market regulator, SEBI to finalise the modalities for allowing FIIs to hedge their currency risk by using exchange traded currency futures in the domestic exchanges.
“The Reserve Bank will continue to work to ease entry while reducing risk to foreign investors from the volatility of flows,” it said in the policy.
“I don’t think we are trying to establish any level (of rupee) in the market. What we do is try and attempt to keep the exchange rate from becoming overly volatile and it will continue to be our policy,” Rajan said.
He said the Reserve Bank has taken into account expansion in foreign currency assets while determining the overall liquidity expansion in the market.
Speaking on the issue of window-dressing by many banks at the end of the year, Rajan warned state-run banks and cricticesed the practice of “window dressing” by state-run banks towards the end of every financial year to meet performance objectives, he said that the RBI will not “bail out” lenders for their bad policies in future.
The year-end should not be a time for any spectacular changes in the banking system and must pass smoothly, Rajan said
Rajan said such adjustments by banks affect various market segments and cited volatility in certificates of deposit starting even from February, which had to be curtailed by the Reserve Bank by improving long-term liquidity through long-term repo.