The Hindu Business Line : Chidambaram backs RBI’s decision to keep rates unchanged

New Delhi, Jan. 29 The Finance Minister, Mr P. Chidambaram, on Tuesday endorsed the “standstill” approach of the Reserve Bank of India in its third quarter monetary policy review, stating that the RBI Governor’s compulsions to keep the policy rates unchanged were understandable for reinforcing price stability.

In the third quarter review of the monetary policy for 2007-08 released today, the RBI Governor, Dr Y.V. Reddy, kept the Bank Rate, reverse repo rate, repo rate and the cash reserve ratio (CRR) unchanged.

“He (RBI Governor) has reinforced the emphasis on price stability. He has emphasised on credit quality and credit delivery, particularly for employment-intensive sectors. He has also resolved to monitor heightened global uncertainties and respond swiftly. That is the correct approach today when there is uncertainty in the international markets,” Mr Chidambaram told reporters in his reaction to the third quarter monetary policy review statement.

Allows flexibility

Describing the policy as a “standstill” one, Mr Chidambaram said that he interprets the policy as one where the RBI has reserved the flexibility to move either way depending upon the emerging situation.

With the US Federal Reserve lowering its policy rate by 75 basis points on January 22, expectations were high among bankers and industry captains that the RBI too would cut rates and narrow the interest rate differential between the two economies.

Capital inflows

To a question on whether he expects enhanced capital inflows into India in the wake of increased interest rate differential, Mr Chidambaram said that it was difficult to take a call on the issue.

“We don’t know what will happen yet. What can we do if they keep reducing their interest rate? The cat can jump either way. There could be increase in capital flows. If there are payment obligations in other countries, there could be outflows also. There are no instant answers to difficult and imponderable issues like this,” he said.

On whether the Government intends to come up with more policy action to manage capital flows, Mr Chidambaram said that he intends to discuss the issues with the RBI Governor in the coming days. “The RBI and the Government will monitor and respond appropriately. Policy stance would be calibrated depending on the emerging situation,” he said.

The RBI monetary policy review had underscored the need for public policy to “effectively, demonstrably and convincingly” indicate commitment to managing capital flows consistent with macro fundamentals through appropriate and decisive policy actions.

Stating that the Indian economy was showing robust performance, Mr Chidambaram said that there was no reason to believe that the Indian economy was slowing down. At the same time, he also noted that the Indian economy was not entirely insulated from the happenings in the rest of the world.

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