Defying expectations from the Government as well as the corporate sector, the Reserve Bank of India (RBI) on Tuesday chose not to go for a rate cut for fifth time in a row but indicated that in the next review there could be a possibility of a shift in gear.
The Government on its part said that it is looking forward to the central bank to support revival of growth and employment.While keeping the short term lending (repo) rate unchanged at 8 per cent, RBI Governor Raghuram Rajan said that “a change in the monetary policy stance at the current juncture is premature”.
“However, if the current inflation momentum and changes in inflationary expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle,” he said.While industry reacted with disappointment saying the RBI has not been accommodating, while the Government, which has also been pitching for a rate cut, said it looked forward to the central bank supporting the revival of growth and employment.
Bankers indicated that there will be no change in lending and deposit rates for now.The repo rate continues to be at 8 per cent while the cash reserve ratio has also been retained at 4 per cent.Following the RBI’s decision, the BSE’s 30-share index Sensex closed at 28,444, down 115.61 points or 0.40 per cent.Rajan, however, said that the industry was being myopic and asserted that the central bank is for the “strongest possible growth”.
“I think there is a misconception in corporate India that the central bank is not concerned about growth,” he added.
Asserting that RBI is not against growth but wants the strongest possible growth while keeping inflation under check, a combative Rajan said, “how do you bring these two togetherIJ By bringing inflation down. Otherwise, we are going to have this high inflation and low growth scenario again and again. And so, I think it is very shortsighted when people comment that you (RBI) are not helping growth this quarter.”
The GDP grew at 5.3 per cent in the second quarter of this fiscal as against 5.7 per cent in the first quarter.On the inflation trajectory, Rajan said he expects it to ease further and average at the 6 per cent.In a statement issued later in the day, the Finance Ministry said it was encouraging that RBI has taken note of the structural change in the outlook for inflation.
“The Government looks forward to the RBI supporting the revival of growth and employment,” the statement said.
Referring to the proposed new monetary policy framework, it said in the weeks ahead, government and RBI will work towards it.The framework would “help institutionalise the gains achieved on the inflation front, so as to reduce inflationary expectations and further support the revival of investment and growth”, the ministry added.
Earlier Rajan had said talks with the government have progressed well and the details will be announced soon.After RBI chief Raghuram Rajan blaming banks for high interest rates and not transmitting the money market benefits, top lender SBI countered the charge and said that banks get very little resources from this market.
“Banks get very little resources from the money market. For instance, SBI does not have a single CD (Certificate of Deposit) in the market and so to that extent the rates coming down in the money market won’t really impact us. Therefore, there is no question of transmission.
“My resources are deposits and not money market instruments. I have no CDs in the market and so transmission from my side doesn’t come in at all,” Arundhati Bhattacharya, SBI Chairperson, told reporters at an event here when asked to comment on Rajan’s view.