RBI leaves rates untouched

RBI leaves rates untouched
The Financial Express, July 29, 2009, Page 1

fe Bureau, Mumbai

The Reserve Bank of India (RBI) kept policy rates unchanged in its first-quarter review of monetary policy for 2009-10, indicating that it was preparing to abandon pumping more money into the economy as inflation concerns return. But the finance ministry, while welcoming RBI’s focus on growth, said the time was not ripe for such an ‘exit’ policy. Finance secretary Ashok Chawla told reporters, “An exit policy is certainly at the back of the mind of central banks all over the world. But there is nothing at this point of time…”

In turn, RBI governor D Subbarao has blamed high government borrowing that “clearly militated against the low interest-rate regime the economy requires in the current situation”. On the way forward, his policy said RBI would have to reverse the expansionary measures to “anchor inflation expectations and subdue inflationary pressures while preserving the growth momentum”. According to the finance secretary, however, “(RBI does) not see the need at this point in time of reversing the accommodative and balanced policy, which they have been following so far.”

The end of the soft monetary policy, which was initiated last October, was criticised by industry. Ficci president Harsh Pati Singhania said, “There are signs of revival in business confidence and some reduction in policy rates at this stage would have helped to provide a fillip to corporate investment, thereby boosting economic growth.”

Industry expected a slight easing of the reverse repo—the rate at which RBI buys surplus cash from banks from the current 3.25%. CII director-general Chandrajit Banerjee also said, “The economy could grow at around 7%, as the fiscal and monetary measures have (an) impact on domestic demand.”

In choppy trade, the BSE Sensex closed 43.10 points lower at 15,331.94. But bankers said they did not anticipate lending rates to rise immediately. SBI chairman OP Bhatt said “There is ample liquidity in the system. Rates will remain the same as long as liquidity is comfortable. As credit growth picks up, there may be some pressure on rates.”

Credit rating agency Moody’s said, “Although the global climate is still a little unstable, cutting rates cannot help to immediately boost domestic activity. Instead, policymakers are counting on previous rate cuts to influence market rates now.”

RBI has raised its inflation forecast for the year to 5 % from its April estimate of 4% and pushed the GDP estimate for 2009-10 to 6%, with an upward bias. “The overall macroeconomic scenario continues to be uncertain, although it is expected that the fiscal and monetary stimulus measures will supplement domestic demand in 2009-10. On balance, an uptrend in the growth momentum is unlikely before the middle of 2009-10,” the policy stated.

RBI has argued that inflation will rise because of the large government expenditure and the accompanying borrowing programme, 54% more than in 2008-09. Subbarao said the abrupt increase in government borrowing has resulted in a hardening of yields, which clearly militated against the low interest-rate regime.

According to him, “The first challenge is to manage the balance between the short-term compulsions of providing ample liquidity and the potential build-up of inflationary pressure on the way forward by maintaining the accommodative monetary stance until demand conditions further improve and credit flow takes hold.”

Endorsing the position, ICICI Bank MD & CEO Chanda Kochhar said, “The strong commitment to managing the government borrowing programme in a manner that is not disruptive to markets and does not crowd out private sector investment should give confidence to market participants.”

Subbarao said the challenges for RBI included maintaining policy rates and liquidity conditions conducive to spurring private investment demand, which has been dented by the crisis. RBI has said the government needs to return to a path of fiscal consolidation, which would lend credibility to the fiscal stance and also give predictability to economic agents. It is also necessary to focus on the quality of fiscal adjustment even while pursuing quantitative targets.

According to Subbarao, RBI’s steps had augmented actual and potential liquidity of over Rs 5,61,700 crore since last October.