The recent sharp depreciation of the rupee against the dollar, higher food inflation coupled with subdued investor sentiments and bottlenecks in infrastructure projects forced the Reserve Bank of India (RBI) on Monday to keep the key repo rate unchanged at 7.25per cent.
The Cash Reserve Ratio (CRR), too, was not touched and will continue to be 4 per cent. “The monetary policy stance has been informed by the evolving growth-inflation dynamics, the balance of risks as well as recent developments in the external sector,” RBI Governor D Subbarao said in the mid-quarter policy review.
The RBI’s decision to maintain status quo seemed to clearly disappoint the Finance Minister P Chidamabram, who said, “I think the Government at various levels conveyed its view to RBI. This is a mid-term review. We recognise that RBI is independent. There is nothing more for me to say at this stage.”
Bankers, too, sounded unhappy and said that there was no scope for them to reduce lending rate. Bank of India chairperson and managing director VR Iyer said there will be no change in lending rates as the cost of deposits continues to be very high.Echoing disappointment over RBI’s decision, India Inc said the time was appropriate for cut in interest rates to revive the country’s economic growth.
The industry hoped that RBI would not wait for the next quarterly review on July 30 to intervene, and would do so earlier if required. In its guidance, RBI particularly flagged risks on inflation, saying “it is only a durable receding of inflation that will open up the space for monetary policy to continue to address risks to growth”.
Commenting on the RBI action, Prime Minister’s Economic Advisory Council Chairman C Rangarajan said the decision has been influenced by external sector considerations, specially widening current account deficit.“It is a difficult choice. The RBI has taken a cautious stand... The decision has been largely influenced by the external sector consideration. The CAD is high and more recently the rupee has been under pressure. This appears to have been a major factor influencing the RBI to pass this stand,” Rangarajan said.
Emphasising that the most significant development in the external sector has been the movement in the exchange rate, RBI said the rupee has depreciated by 5.8 per cent against the US dollar during the current financial year up to June 14.
It fell by 6.6 per cent during May 22-June 11 due to sell-off by foreign institutional investors, reflecting risk-off sentiment triggered by apprehensions of possible tapering off of quantitative easing by the US Fed, it said. Rupee touched a record low of 58.96 to a dollar last week.
Expressing concerns over the price situation, RBI said expensive food items like cereals and vegetables have continued to put pressure on overall inflation rate. Though the headline inflation has come down, RBI also sounded concerned over the persistently high food inflation, which has been hovering close to 10 per cent.
“Inflation has moderated as projected. However, upside pressures on the way forward from the pass-through of rupee depreciation, recent increases in administered prices and persisting imbalances, especially relating to food, pose risks of second-round effects,” it said. “Future monetary policy stance will be determined by how growth and inflation trajectories and the balance of payments situation will evolve in the months ahead,” it added.
RBI Governor noted that since the May 3 Annual Policy statement, global economic activity has slowed and risks remain elevated, most recently on account of uncertainty over policies of key central banks of the world.