The Reserve Bank of India (RBI) stuck to policy rates in its fourth bi-monthly monetary policy review Wednesday. The move, having come before Diwali, would dampen the festive spirit as banks are unlikely to cut interest rates on existing loans, and may not roll out any festive offer.

Prospective home and automobile buyers will put their plans on hold as there is no likelihood of a drop in interest rates. The only silver lining is that the central bank has reduced the statutory liquidity ratio requirement for banks, which would enable them to keep more cash at their disposal.

This may prompt them to offer loans at a discount to take advantage of the festive spirit. However, this too is a long shot as several banks are holding liquidity in excess of statutory requirement. Unless banks decide to pass on some benefits from their margins, there is no hope of softening in interest rates until next year.

The six-member monetary policy committee’s decision to hold on to rates follows its anticipation for an upward risk to retail inflation. The panel kept repurchase rate (the rate at which the central bank infuses liquidity in the system) at 6 per cent.

Also, in a sign of its recognition of the sluggish trend in growth, the bank has downgraded the growth projections from 7.3 per cent to 6.7 per cent. Here, the move of the RBI sounds contradictory.

Even as it admits that growth has stuttered and the economy badly needs dollops of money to put growth back on track, it has refused to loosen the purse strings. A 25-basis points (bps) cut in repo rate would have enthused investors and people at large ahead of the festival.

The central bank’s fixation with inflation, something that has been in vogue since Raghuram Rajan’s time, has held its hands. In the last policy meeting in August, the central bank slashed repo rate by 25 basis points.

However, since then inflation as measured by the consumer price index (CPI) has accelerated. Higher food prices stoked CPI inflation in August taking it to 3.36 per cent. Inflation has climbed by 190 basis points in the last two months alone.

Contemporary developments such as farm loan waivers by state governments, implementation of the seventh pay commission recommendations by many states, a fall in prices consequent to implementation of GST and projected lower kharif output have combined to sustain the fear for an inflation markup.

International crude prices that remained more or less subdued for three years now have begun to claw back to a higher trajectory nearing 60 dollars per barrel. At present, fuel rates in the country have been ruling at a three-year high.

Although the Centre effected a reduction of two rupees in excise on petrol and diesel, it is too little to absorb price escalation. The RBI has factored in all these sides before assuming an upward rise in headline inflation.

While acknowledging the need for a stimulus to accelerate growth, the central bank has called upon the government to do its best to encourage private sector investments. It has chosen to pass the buck to the government to do whatever it could at its disposal.

It has sought plugging the infrastructure gap, restarting stalled investment projects, simplifying GST and enhancing ease of doing business, among other measures, to kick start economic revival.

An economy, reeling from sustained recession for over a year and aggravated by the implementation of GST and demonetisation, was looking up to the RBI for a salve. But the bank has refused to oblige.

The Centre sent out feelers on the eve of the policy review by cutting down excise duty on fuel. Granted that there are upside risks to inflation going forward, one wishes that the RBI had also given greater weightage to the sagging growth impulses in the economy.

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