Reserves Bank of India's (RBI) decision to keep status quo in its December policy review came as a breather for the common man, bankers and stock markets alike.
RBI surprised everybody on Wednesday as it left key policy rates unchanged despite steep inflation numbers. But central bank at the same time also warned of a possible rate hike if the inflation continues to stay high. Cheering to RBI's move, the benchmark index Sensex snapped from its six day fall and closed after gaining 247.72 points at 20,859.86.
RBI has kept the repo rate or short term lending rate unchanged at 7.75 per cent along with the cash reserve ratio (CRR) at 4 per cent. With the next policy review scheduled on January 28, RBI Governor Raghuram Rajan stressed, "If inflation in food and fuel do not fall, RBI will act on off policy date." like the stock markets, bankers also welcomed the RBI's move to keep the short term lending rates unchanged and said that it would help banking sector to recover and stabilise.
But the biggest respite came to the fears of the common man, who was already burdened with high interest rates. The move means that atleast in near future their interest payments would not increase. Apart from that, RBI's view towards inflation easing in the coming days would, is of huge psychological support for the general public and industry.
Giving its view on the future of inflation RBI said, "There are indications that vegetable prices may be turning down sharply, although trading mark-ups could impede the full pass-through into retail inflation. In addition, the disinflationary impact of recent exchange rate stability should play out into prices." Expressing concerns on high inflation, Rajan said, "Given the weak state of economy, the inadvisability of overly reactive policy action, as well as the long lags with which monetary policy works, there is merit in waiting for more data to reduce uncertainty."
Since taking over as the RBI chief in September, Rajan had increased the key rate by 0.50 per cent in two installments. The status quo decision came as a surprise as only last week the RBI had pulled up banks for not helping it in monetary policy transmission. The decision to keep rates unchanged will be a big breather for the industry and retail borrowers in particular as the markets had expected another 0.25 per cent hike in the short term lending rate.
While explaining the reason behind the policy review, RBI in its statement said, "The negative output gap, including the recent observed slowdown in services growth, as well as the lagged effects of effective monetary tightening since July, should help contain inflation. Given the wide bands of uncertainty surrounding the short term path of inflation from its high current levels, and given the weak state of the economy, the inadvisability of overly reactive policy action, as well as the long lags with which monetary policy works, there is merit in waiting for more data to reduce uncertainty."
Talking about the economy, Rajan said, growth is set to improve in the second half of this financial year on the back of expansion in the agriculture sector, exports and movement in stalled projects. Gross domestic product (GDP) growth in the second quarter of this financial year came in at 4.8 per cent after a reading of 4.4 per cent in the first quarter, resulting in a 4.6 per cent expansion in the first half.
With retail inflation rising to a nine-month high of 11.24 per cent in November, WPI inflationg surging to its 14-month high of 7.52 per cent last month and factory output declining 1.8 per cent in October, RBI thinks that the decision of keeping everything unchanged is a tricky one but things would improve. RBI sees the situation to ease from December as food prices cool on better supplies with winter crops coming in and hence is going to wait for the trend to reverse before making any major changes in the monetary policy.
Explaining the RBI's rationale for the policy stance,the Governor said, "We are not soft on inflation. We are waiting for more data. As the data come in, we will react appropriately." The 10-year Government bond yield fell 13 basis points to end at 8.78 per cent as against 8.91 per cent during the opening trade. Rajan said he expects stronger growth in the second half of this financial year, aided by higher expansion in agriculture, exports and a revival in stalled projects.
The Governor, who took charge in early September, said he would stick with the earlier 5 per cent growth projection for the full year, with minor fluctuations. Rajan exuded confidence in the government's ability to meet the fiscal deficit target of 4.8 per cent of GDP. A cut in government spending, increase in disinvestment and greater revenue from state-owned companies will help meet the target.
Expressing happiness over the way the rupee is faring, Rajan said, "We are happy with the reduction in volatility and that was our aim right through. "We also wanted to reduce the unhinged expectations on the rupee. There was a point where analysts were competing with each other to see how weak they could proclaim the rupee to be at the end of the year... We hope that unhinging of expectations has come down."