The Reserve Bank of India (RBI) on Tuesday left the key policy rate unchanged at eight per cent, defying pressure from the finance ministry to lower rates. The central bank, however, cut the cash reserve ratio (CRR), the portion of deposits banks have to maintain with it, to 4.25 per cent, freeing up Rs 17,500 crore of additional funds.
In his second quarter monetary policy announcement, RBI Governor D Subbarao offered a ray of hope to the ministry and a disappointed corporate India by saying there was “reasonable likelihood” of policy easing early next year.
Finance Minister P Chidambaram didn’t make any effort to hide his disappointment with the central bank’s decision to hold its ground by maintaining its anti-inflationary stance. He told reporters after the policy announcement that growth was as much a challenge as containing inflation and the government would “walk alone” to face the challenge if it came to that. “Sometimes it is best to speak, sometimes it is best to remain silent. This is the time for silence,” the minister said.
During his post-policy media briefing, Subbarao, however, sought to play down the face-off and said, “Both the government and RBI share concerns on growth and inflation. We are as concerned about growth as we are concerned about inflation, only our balance will be shifting.”
“The policy stance anticipates the projected inflation trajectory, which indicates a rise in inflation over the next few months before easing in the last quarter. While there are risks to this trajectory, the baseline scenario suggests a reasonable likelihood of further policy easing in the fourth quarter of this fiscal year,” Subbarao said.
Investors were disappointed and pushed bond yields and swap rates higher and stocks lower. The yield on the 10-year benchmark government bond ended at 8.18 per cent, up five bps over the previous close.
Justifying his decision to hold rates, Subbarao said during tight liquidity conditions, a rate cut might not inspire banks to lower lending rates. “We were very conscious of the fact that a rate cut will not help if liquidity is tight. Conversely, even if we are comfortable with liquidity, it will not help if rates are high. Hence, we had to carefully calibrate between the repo rate and the cash reserve ratio,” Subbarao said.
Though most bankers said lending rates would take some time to soften, State Bank of India Chairman Pratip Chaudhuri indicated the bank’s asset-liability committee would meet in the next couple of days to take a call on rate cut. “We will prefer a more secular rate cut, with adjustment in the base rate, because we have almost completed rebalancing of the portfolio. We may not touch the spreads, but it’s for the committee to take a call,” Chaudhuri said.
The RBI revised down its growth forecast to 5.8 per cent for 2012-13 from 6.5 per cent previously while March-end inflation is now seen at 7.5 per cent, compared to seven per cent earlier.