In keeping the policy rates unchanged, the RBI has voiced its concerns on deterioration in the general economic environment.

The RBI Governor has done what he had said in the April statement — that he would watch progress on inflation as well fiscal consolidation.

Possibly, the action around oil price revision and the continued weakness of rupee, with no significant signs of the current account deficit improving, left the Governor apprehensive about future inflation levels.

Consequently, in the face of pent-up industry expectation of a rate cut, the RBI has shown resilience to pressure.

The RBI's step is quite understandable and the conviction shown in holding its views in the face of opposite expectations from several quarters needs to be commended.

However, one is left with the impression that reducing rates may have worked better from a systemic perspective.

It would allow banks and financial institutions to start passing the benefit of lower cost to the borrowers, which could be a tool against inflation.

This is especially so, considering that the elements keeping inflation higher than the comfort zone, are beyond control.

While the RBI has demonstrated its desire to manage liquidity within reasonable levels, measures to improve liquidity in a structural manner would have been helpful. While open market operations are one way of providing liquidity, it keeps the cost of liquidity high for the banks.

As a result, there has been a limited transmission of the earlier rate cut to customers. With continuing pressure on short-term liquidity, the yield curve for corporates continues to be inverted and supply for long-term borrowings gets limited. It almost seems like the rates were not reduced in April.

(The author is President and whole-time Director, L&T Finance Holdings.)

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