The Hindu Business Line : RBI’s current priority: Containing inflation

No news is perhaps good news is how the banking circles here summed up their reactions to the maintenance of status quo by the RBI in the third quarter review of credit policy. Perhaps the monetary authorities, as the banking circles here felt, would not like to lower their guard particularly with the possibility of rising inflation in the wake of surging global oil prices. The priority, as it appeared from the policy announcement, was clearly for containing inflation even if it meant a slightly lower growth.

Inquiries revealed that the banks here were expecting cuts in repo rate, even by as low as 0.25 per cent. A 0.75 per cent cut in interest rate by US Federal authorities was the basis of their expectation.

Slight cut

More importantly, with the inflation currently being under control and there being no dearth of liquidity in the system, there was speculation that perhaps a slight cut in rates, including bank rate, would not have been all that bad.

But the RBI clearly thought differently. In its assessment, the management of capital inflows, and price and financial stability needed more attention than boosting the demand for funds through rate revision, particularly with volatile global situation. The banks are clearly in a dilemma. The funds are available to them but only at a cost. A cut in bank rate and lower CRR (cash reserve ratio) would have helped them access some additional funds at a lower cost. Banks earn hardly anything on funds locked under CRR. But that did not happen. This is for the first time in last two years that the RBI chose not to hike the key rates making it clear that in its view the continuation of the policy was the best thing to do in the current situation, observed banking sources. Otherwise, there was nothing much in the policy announcement, the sources added.

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