RBI maintains status quo, hints at rate cut in January

Mumbai  : The Reserve Bank of India (RBI) Tuesday kept key policy rates unchanged but hinted at cutting rates in January, saying the focus of the monetary policy would now shift to spurring growth as inflationary pressures are easing.

“In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth from this point onward,” RBI Governor D. Subbarao said in the mid-quarter review of monetary policy.

The central bank has kept repo rate, the rate at which it lends to the commercial bank, unchanged at 8 percent. Reverse repo rate, interest rates the central bank pays to the commercial banks on their money kept, remains unchanged at 7 percent.

The RBI also kept the cash reserve ratio (CRR), proportion of money commercial banks have to park with the central bank, unchanged at 4.25 percent, after lowering it the previous two policy reviews.

The central bank’s action means there would be no change in lending and deposit rates by the commercial banks. Overall cost of borrowings, equated monthly installments (EMIs) and interest rates on fixed and other deposits will remain unchanged.

Reacting to the central bank’s move, State Bank of India (SBI) chairman Pratip Chaudhuri said the commercial banks are unlikely to cut rates unless there easing in the monetary policy.

Planning Commission Deputy Chairman Montek Singh Ahluwalia said the RBI needed to cut rates to boost economic growth.

“Over a longer period of time, steps are needed to bring down the interest rate. RBI looks at these things independently and we should give them freedom to decide on interest rates,” Ahluwalia said.

In the second quarter review of monetary policy Oct 30, the RBI had lowered the CRR by 0.25 percent, but had kept unchanged the repo and reverse repo rates, which determine lending and borrowing rates by commercial banks.

As per latest data released last week, the annual rate of inflation based on wholesale price index declined to a 10-month low of 7.24 percent in November against 7.45 percent in the previous month, according to the government data released last week.

However, wholesale price-based food inflation increased to 8.50 percent in November this year from 8.32 percent recorded in the corresponding month of previous year.

This was largely due to an exponential rise in the prices of cereals, rice, wheat and pulses, according to data released by the ministry of commerce and industry.

“The new combined (rural and urban) CPI (consumer price index) inflation increased in November, reflecting sustained food inflation pressures, particularly in respect of vegetables, cereals, pulses, oils and fats,” the bank said.

Meanwhile, the growth in the country’s gross domestic product in the second quarter of this fiscal at 5.3 percent was marginally lower than the 5.5 percent logged during the first quarter — which has been a matter of concern for all stakeholders.

But the Reserve Bank relented in giving in to demands for a rate cut citing inflation as a key reason. However, in its future guidance the RBI said there is a possibility of policy easing in the fourth quarter, if the core inflation continues to decline.

“In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards. Liquidity conditions will be managed with a view to supporting growth as stated in the SQR (second quarter review), thereby preparing the ground for further shifting the policy stance to support growth,” it said.