Money & Banking

RBI pauses - finally!

N.S. Vageesh Mumbai | Updated on March 12, 2018 Published on December 16, 2011

The RBI said a reversal in its tightening cycle may happen if conditions improve. Photo: Kamal Narang

The Reserve Bank of India took a pause from its rate tightening cycle in its mid- quarter monetary policy announcement today. After 13 consecutive hikes over the past 20 months, the Reserve Bank of India decided to stay still and do nothing. It also provided guidance that a reversal in its tightening cycle may happen if conditions improve.

The RBI's last 13 hikes cumulatively amounted to a 350 basis point increase in key interest rates. The repo rate (the RBI's key policy rate - the rate at which the RBI lends money or infuses liquidity to banks) remains at 8.50 per cent, while the cash reserve ratio remains at 6 per cent.

Over the past few weeks, there has been a clamour from bankers and the market for a reduction in repo rates as well as cash reserve ratio, as growth was slowing down. However, with inflation still remaining high at over 9 per cent, a cut might have sent the wrong signal about its intentions. As leading economist and a former Deputy Governor, Dr S.S.Tarapore, put it in an edit page article in Business Line today, "A monetary policy relaxation would earn encomiums for the RBI but would be deterimental to long term growth with price stability".

Even earlier, Dr Subir Gokarn, Deputy Governor, Reserve Bank of India, had pointed out that CRR was a monetary policy tool which would not be used merely to address liquidity shortages.

CYCLE REVERSAL SOON

The RBI reiterated the guidance it had given at the time of the second quarter review. While noting that downside risks to growth remained, it said, "The guidance given in the second quarter review was that, based on the projected inflation trajectory, further rate hikes might not be warranted. In view of the moderating growth momentum and higher downside risks to growth, this guidance is being reiterated. From this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth."

Published on December 16, 2011
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