The Reserve Bank of India’s guidance on shifting the policy stance to support growth is an indication that it will cut rates in its third quarter review of monetary policy on January 29, say bankers and economists.

“In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards,” RBI said in its policy statement.

The central bank’s decision to keep the key policy rates unchanged for now was not surprising, but its decision to maintain the Cash Reserve Ratio (CRR) at 4.25 per cent was “disappointing,” said bankers and economists.

The central bank kept the repo rate and reverse repo rate unchanged at 8 per cent and 7 per cent respectively. It also left the CRR, the slice of deposits that banks keep with RBI, unchanged at 4.25 per cent.

RBI guidance

RBI Deputy Governor Subir Gokarn said: “We are looking at guidance (shifting the policy stance to support growth) in terms of a rough period when we think inflation numbers will start moving down on a sustained basis. This is our guidance for the quarter and we continue with that.” On why the RBI did not cut CRR, Gokarn said the current tightness in liquidity is largely due to government balances with the RBI and that is not going to be a persistent phenomenon. Hence, using a long-term tool as the CRR is unwarranted.

Chanda Kochhar, MD and CEO, ICICI Bank, said: “The RBI has indicated monetary policy easing in the coming quarter. This signal of a shift in the focus of monetary policy from inflation to growth is a welcome move.”

According to C.V.R. Rajendran, Executive Director, Bank of Maharashtra: “With the policy rates remaining unchanged, there is no reason for us to cut either deposit or lending rates. Inflation is likely to peak out in January. But it remains to be seen if it will come off to give comfort to the RBI to cut rates.

According to Bhaskar Sen, Chairman and MD, United Bank of India, the bank will take a call on its interest rates at its Asset-Liability Committee (ALCO) meeting. As of now, there is not likely to be any change in our stance so far as interest rates are concerned. However, we will review it (the interest rates) at our ALCO meeting.

Rana Kapoor, Managing Director & CEO, YES Bank, said amidst a synchronised intensification of concerns on both inflation and growth since the beginning of the fiscal year, the recent moderation in both headline and core WPI inflation has been adequately recognised by the RBI. Additionally, with uncertainty continuing over the resolution of the fiscal cliff in the US, the RBI’s status quo on rates seems appropriate. A further abatement in price pressures will help RBI to shift focus and respond to threats to growth, by cutting repo rate as early as in the next monetary policy meeting in January.

The decision to keep key policy rates unchanged was largely on expected lines, said M. Bhagavantha Rao, Managing Director, State Bank of Hyderabad. “I look forward to January for substantial announcements,’’ he told Business Line. Shiv Kumar, Managing Director, State Bank of Bikaner and Jaipur, said inflation was coming in the way of any possible reduction in rates. On the impact, he said: “We, at SBBJ, had already reduced 25 bps in our base rate after the last reduction in CRR. There are challenges in the economy.’’

Tight rein

M. Narendra, Chairman and Managing Director, Indian Overseas Bank, said: The RBI has complemented the efforts of the government by keeping a tight rein on monetary policy lest the rising investor expectations are dampened by sticky inflation. “It has wisely chosen to watch the trend before taking a decisive monetary step to accelerate growth in tandem with the Budget for 2013-14. Meanwhile, adequate liquidity has been assured for immediate growth.”

Abheek Barua, Chief Economist, HDFC Bank, said: The central bank might cut the repo rate by 25 basis points in the next review in January and follow it up with another 25 basis points cut in March. Given the RBI’s guidance in its second quarter review in October of policy easing only in Q4 FY13, today’s review was never really meant to be an especially dramatic event. All the market was really looking for at this stage was a clear pro-growth signal from the central bank either by way of a more explicit policy easing guidance than was the case in October or by way of a CRR cut. Unfortunately though, the monetary authority appears to have disappointed somewhat on both counts.

Leif Lybecker Eskesen, Chief Economist for India & ASEAN, HSBC: The RBI danced to its own tune and kept the policy rate on hold in light of the persistence of inflation and lingering upside risks to inflation. However, it is gearing up for potential policy rate cuts early next year, assuming inflation risks recede and policy progress on other fronts is sufficient.

(With inputs from Hyderabad and Chennai bureaus)

(This article was published on December 18, 2012)
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