Central bank hints at rate cut in fourth quarter to support growth

The Reserve Bank of India on Tuesday chose to hold interest rates steady in its Mid-Quarter Review of Monetary Policy. Reason: Inflation could edge higher over the next two months.

However, the RBI held out the hope of a cut in key interest rates in the fourth quarter (January-March) to support growth.

Although inflation (the rate of change of prices of goods and services) pressures appear to be moderating (from 9.46 per cent a year ago to 7.24 per cent now), the RBI feels that elevated food and commodity prices remain a contingent risk (a risk which is likely but not certain to materialise).

Hence, the RBI left the repo rate (the interest rate at which banks borrow funds from the central bank to tide over temporary liquidity mismatches) unchanged at 8 per cent.

The cash reserve ratio (the slice of deposits that banks have to park with the RBI) was held steady at 4.25 per cent of deposits.

The RBI’s stand to leave key interest rates unchanged may have been bolstered by Finance Minister P. Chidambaram’s comments late last week.

The Finance Minister said: “While headline inflation has moderated to 7.5 per cent, inflation measured by the consumer price index remains sticky at 9.9 per cent. There is no reason at all to be complacent.”

deposit, lending rates

Indian Overseas Bank Chairman and Managing Director M. Narendra said his bank will not be able to cut interest rates on core (retail) deposits. Ditto on the lending rate front too as cuts have already been effected on loans to the retail and small and medium enterprise segments.

With the policy rates remaining unchanged, there is no reason for banks to cut either deposit or lending rates, said C.V.R. Rajendran, Executive Director, Bank of Maharashtra.

“Inflation is likely to peak out in January. But it remains to be seen if it will come off thereafter to give comfort to the RBI to cut rates,” he said.

Guidance

The RBI said the emerging patterns on headline inflation (includes food and energy) and core inflation (excludes food and energy) reinforce the likelihood of steady moderation in inflation going into 2013-14.

Headline inflation has been below RBI’s projected levels (of 7.5 per cent). “In view of inflation pressures ebbing, monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards,” said the RBI in a statement.

Economists say, going forward, the RBI may have to cut rates to support economic growth. GDP growth in the July-September quarter at 5.3 per cent was marginally lower than 5.5 per cent in the April-June quarter.

The Government’s mid-year economic analysis has pared the GDP growth projection for 2012-13 to between 5.7 to 5.9 per cent from the budgeted 7.6 per cent.

Equity markets UP

Despite the RBI inaction on the policy front, the bellwether BSE Sensex ended up 0.63 per cent (or 120.33 points higher) at 19,364.75 points. Gains in the Bharti Airtel, L&T, ITC, ICICI Bank, Tata Steel, HDFC and Tata Motors stocks pulled the Sensex up.

The BSE Bankex ended 0.34 per cent higher mainly on the back of rise in the stocks prices of Bank of India, Federal Bank, State Bank of India, Bank of Baroda and IndusInd Bank.

Ramkumar.k@thehindu.co.in

(This article was published on December 18, 2012)
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