Citing the depreciating rupee, high food inflation, and the huge current account deficit, Reserve Bank of India Governor, D. Subbarao on Monday decided to leave key rates unchanged.

Since January, the RBI has cut the repo rate thrice by 25 basis points each to support growth. It cut the CRR once, by 25 basis points in February, to ease the liquidity pressure in the banking system.

Now, the repo rate (the interest banks pay the RBI to borrow short-term funds) remains at 7.25 per cent and the Cash Reserve Ratio (the slice of deposits banks park with the central bank) stands at 4 per cent. With the central bank not obliging with a rate cut in the mid-quarter monetary policy review, it is unlikely that banks will cut deposit or lending rates.

The rupee weakened to close 34 paise down at 57.87/dollar on high demand for the American currency from oil importers and some corporates. The rupee dipped even as the RBI said the main challenge is to reduce the current account deficit to a sustainable level. CAD, which touched an all-time high of 6.7 per cent of GDP in October-December, arises when a country's total imports of goods, services and transfers exceed exports. A widening CAD exerts downward pressure on the rupee, making imports costlier. This is a cause for concern for the government as expensive crude oil imports have inflationary impact.

For the RBI, the bigger evil remains inflation that is holding it back from cutting rates despite the economic growth in 2012-13 slumping to 5 per cent. “It is only a durable receding of inflation that will open up the space for monetary policy to continue to address risks to growth,” said the RBI statement. As the equity market did not expect the RBI to cut rates, the bourses did not react negatively, and the benchmark BSE Sensex closed 148 points up at 19,326 on gains made by auto, engineering goods and IT stocks.

Industry disappointed

Reacting to the RBI’s decision, Chandrajit Banerjee, Director-General, CII, said: “The status quo on policy rates is disappointing. At a time when both growth and inflation dynamics call for an accommodative monetary policy, the RBI has taken a cautious approach of attending to the prospect of a possible resurgence in inflation over reviving growth in the economy.”

Naina Lal Kidwai, President, FICCI, said: “Given the depreciation in the value of the rupee, the RBI’s decision was not totally unexpected. Despite the 75 basis point cut in repo rate so far this year, the investment sentiment hasn’t really become buoyant and apprehensions remain”

(This article was published on June 17, 2013)
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