RBI keeps rates unchanged; Chidambaram unhappy

Mumbai : The Reserve Bank of India (RBI) Tuesday cut cash reserve ratio (CRR) for banks by 0.25 percent but kept interest rates unchanged, despite pressure from the government.

The CRR, the money against deposits which commercial banks have to retain in the form of liquid assets such as cash, has been cut to 4.25 percent from 4.5 percent. It will release Rs.175 billion into the system.

However, the central bank kept other policy rates and reserve ratios unchanged. This means borrowing costs by companies as well as individuals would remain high.

Finance Minister P. Chidambaram appeared disappointed over the RBI move and said the government would walk alone to face the challenge of growth.

“Growth is as much a concern as inflation. The government has to walk alone to face the challenge of growth… Sometimes it is best to speak and sometimes it is best to be silent. I think this is a time for silence,” Chidambaram said in New Delhi, making his unhappiness over the RBI’s policy apparent.

A day before the RBI policy review, the finance minister had announced a five-year road map for fiscal consolidation, setting a target of cutting the fiscal deficit to 3 percent by 2016-17 from 5.8 percent recorded in 2011-12.

“The government is doing its best to send a clear message that we are on the path of fiscal consolidation and it is my hope that everybody will understand the government’s commitment of fiscal consolidation,” Chidambaram said.

While announcing the policy review, RBI Governor D. Subbarao, however, said inflationary pressure was likely to worsen in the next couple of month and therefore the time was not right to cut interest rates.

“The reduction in the cash reserve ration is intended to pre-empt a prospective tightening of liquidity conditions, thereby keeping liquidity comfortable to support growth,” Subbarao said, explaining the rationale of policy action.

“The persistence of inflationary pressures even as growth has moderated, remains a key challenge. In this respect, India is an exception to the global trend, which underscores the role of domestic structural factors.”

In September, the RBI had cut the CRR by a similar 25 basis points, releasing Rs.17,000 crore into the system.

Subbarao said the central bank was also concerned about the growth but the time was not right to cut interest rates.

Asked about Chidambaram’s disappointment over the RBI move, Subbarao said: “If you want to ask about the finance minister’s statement, I think, you should ask him.”

Planning Commission Deputy Chairman Montek Singh Ahluwalia also expressed similar concern as Chidambaram, saying the need to push growth should take precedence over managing inflationary pressure.

“We need to watch what happens in inflation but probably the need to push the growth at this moment is little higher on agenda than the concern about inflation,” Ahluwalia told reporters.

The policy announcements hit market sentiments, with the benchmark Sensex of the Bombay Stock Exchange falling 205 points or 1.1 percent to 18,430.85 points.

Reacting on the RBI move, bankers said 0.25 percent cut in CRR would not have any significant impact on lending and borrowing rates by the commercial banks.

“Lending rates are not going to come down immediately, though the rates may fall over a period of time,” ICICI Bank chief executive Chanda Kochhar told reporters at the post-policy media briefing.

SBI chairman Pratip Chaudhuri said the bank officials would meet in a day or two to take a call on interest rates.

Following are the new policy rates and reserve ratios:

Bank rate: 9 percent

Repurchase Rate: 8 percent

Reverse Repurchase Rate: 7 percent

Marginal Standing Facility Rate: 9 percent

Cash Reserve Ratio: 4.25 percent

Statutory Liquidity Ratio: 23 percent