RBI surprise: No rate cut, repo, CRR unchanged

CNN-IBN | 18-Jun 11:10 AM

New Delhi: The Reserve Bank of India (RBI) at its mid-quarter monetary policy review on Monday kept the repo rate and the Cash Reserve Ratio (CRR) unchanged at 8.0 per cent and 4.75 per cent, respectively, dashing market hopes of a 25 basis point cut.

The central bank said in a statement, "On the basis of an assessment of the current macroeconomic situation, it has been decided to: keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.75 per cent of their net demand and time liabilities; and keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.0 per cent."

Repo rate is the rate at which the RBI lends to banks. It is used as a reference rate by those banks to lend to customers. Meanwhile, the CRR is the portion of deposits that a bank is supposed to keep with the RBI. It is largely used as a means of credit control and keeping a check on inflation.

The RBI statement added, "The Reserve Bank had frontloaded the policy rate reduction in April with a cut of 50 basis points. This decision was based on the premise that the process of fiscal consolidation critical for inflation management would get under way, along with other supply-side initiatives.

"Our assessment of the current growth-inflation dynamic is that there are several factors responsible for the slowdown in activity, particularly in investment, with the role of interest rates being relatively small. Consequently, further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures."

Prime Minister's Chief Economic Advisor Dr C Rangarajan said the central bank had taken a very cautious stance. "The RBI has taken a very cautious stance. There wasn't enough room to cut rates."

After cutting its policy rate by 50 basis points to 8.00 per cent in April, the RBI had been widely expected to leave rates unchanged in June. But global and domestic economic conditions have deteriorated sharply since then.

India's March quarter economic growth of 5.3 per cent was far worse than expected and the weakest annual pace in nine years. The data sparked calls from industry for immediate action to lift an economy that Standard & Poor's says could be the first BRIC nation to lose its investment-level credit rating.

April industrial output figures last week suggested little pickup in economic growth heading into the current quarter.

The government is politically hamstrung, so is unable to drive reform and its deep fiscal deficit leaves it no room to provide stimulus spending at a time when the euro area debt crisis is weighing on the global economy, a factor set to dominate a G20 meeting in Mexico on Monday and Tuesday.

Investors and companies have long called for India to implement pro-growth policies that would spur investment and help remove bottlenecks in the economy blamed both for restricting growth and keeping inflation high.

Some economists, however, feel that cutting interest rates is not the solution.

"It is the wrong medicine to cure the growth ails given the supply-driven slowdown in growth," HSBC economist Leif Eskesen wrote in a client note on Friday.

"Teasing up demand would only risk generating more inflation. We think deeper structural reforms are needed instead, and soon," he said.

A Reuters poll on June 5 showed most economists expected a 25 basis point cut in the repo rate to 7.75 per cent. Most respondents did not foresee a cut in the cash reserve ratio, but expectations for a cut have gathered pace since then.

On Friday, the ruling Congress party named Finance Minister Pranab Mukherjee as its nominee for the largely ceremonial post of president, ending a protracted political drama that had exposed the weakness of the coalition government.

With no obvious successor, Prime Minister Manmohan Singh, 78, could take charge of finance for now, a source close to the finance minister told Reuters on condition of anonymity. As finance minister during India's balance of payments crisis in 1991, Singh was the architect of reforms that spurred accelerated growth.

(With inputs from Reuters)

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