RBI holds back rate cut

RBI holds back rate cut
HT Business, January 28, 2009, page 1

HT Correspondent, Mumbai, January 27: While the overall inflation number looks comfortable, the Reserve Bank of India fought shy of cutting benchmark policy interest rates further on Tuesday because the prices of sensitive food items are still not under control.

The RBI is worried about the increase in prices of primary articles, which is still in double digits, though the overall wholesale price-based inflation has dropped to 5.6 per cent from 13 per cent in August.

“In view of the divergent movement of various price indices and their components, and overall increase in global economic uncertainties, an assessment of underlying inflation for policy purposes becomes inherently complex,” said RBI governor Duvvuri Subbarao after he unveiled the third quarter policy review of the monetary policy.

“Given the enormity of the economic situation, the need is for systematic, calibrated and continuous rate cut signals,” said Abheek Barua, Chief Economist at HDFC Bank. “The RBI is being reactive and wants to respond to crisis and eventualities.”

Tushar Poddar, Economist at Goldman Sachs, echoed Barua’s views. “We think that more immediate action is necessary given the long lags with which monetary policy influences lending rates and overall activity, rather than wait for activity to deteriorate further,” Poddar said.

The current economic crisis is about growth and liquidity and going by the aggressive rate cuts since September 2008, inflation, or one component of it, should no longer be a concern.

“We think that the WPI (wholesale price indeed) and CPI (consumer price index) based inflation will fall significantly going forward and the RBI needs to take account of this. We still expect rate cuts before the end of 2008-09,” Goldman’s Poddar said.

The RBI has lowered its WPI target for end-March 2009 to 3 per cent from 7 per cent and cut GDP growth forecast for 2008-09 to 7 per cent, with a downward bias, from 7.50-8.0 per cent earlier.