As widely expected, the Reserve Bank of India has refrained from immediate action on lowering of key lending rates till there are signs of further easing of inflation. Its mid-quarter review on the eve of Budget has kept repo and other policy rates unchanged while it has recently effected a solid reduction in reserve ratio (CRR) to 4.75 per cent, to take care of structural liquidity deficit.
Taking an overall positive view of emerging trends, global and domestic RBI review on March 15 said recent growth-inflation dynamics have led it to indicate that “ no further tightening is required and that future actions will be towards lowering the rates”. However, notwithstanding the deceleration in growth, inflation risks remain, “which will influence both the timing and magnitude of future rate actions”, it said by way of guidance.
A day ahead of the Union Budget presentation in Lok Sabha by Finance Minister Mr Pranab Mukherjee, RBI again has drawn attention to the fiscal situation with the deficit crossing the budget estimates and said “credible fiscal consolidation” would be an important factor in shaping the inflation outlook.
“Notwithstanding the deceleration in growth, inflation risks remain, which will influence both the timing and magnitude of future rate actions,” the RBI said in its mid-quarter review statement.
“The RBI has decided to wait for another six weeks to see how inflation would behave before deciding on the rate cut,” C Rangarajan, Chairman of the Economic Advisory Council to the Prime Minister told NDTV Profit.
The cash reserve ratio (CRR), which is the amount of funds that the banks have to keep with RBI, also remains unchanged at 4.75 per cent. The central bank had reduced the CRR by 0.75 per cent last week to ease the liquidity situation.
The inflation data released yesterday showed February wholesale price index inflation at 6.95 percent, slightly lower than the RBI’s March-end projection of 7 percent.
Praising the central bank for its focus on inflation, Samiran Chakraborty, Chief Economist at Standard Chartered said, “The inflation bias of the central bank remains… the Reserve Bank is showing its credibility that inflation is a priority and it needs to be brought down in a sincere fashion.”
The decision means that interest rates on home and other consumer loans are unlikely to be revised lower before April when the RBI will announce its annual policy. The central bank has not cut rates for nearly three years. In this period, the repo rate has gone up by 3.5 per cent to 8.5%.
“We didn’t expect a rate cut at all… unless there is some clarity on core inflation, crude prices and fiscal deficit we will not see rate cuts,” Keki M Mistry, VC & CEO of HDFC Ltd said.
However Mistry said that home loans should go down by 75-100 basis points in a year from now if oil prices don’t spike to $180-200 per barrel.
Here are the highlights of the complete policy announcement.
MEASURES
- RBI policy keeps Repo Rate, CRR unchanged
- RBI policy keeps Repo Rate unchanged at 8.50%
- RBI policy keeps CRR unchanged at 4.75%
INFLATION
- “Credible fiscal consolidation” key for inflation outlook
- Fiscal slippages adding to inflationary pressures
- Notwithstanding growth slowdown, inflation risks remain
- Timing, magnitude of future rate action to hinge on inflation
- Rise in crude prices have increased upside risks to inflation
- Rupee fall, fiscal gap has increased upside risk to inflation
- There is still significant suppressed inflation in fuel
- Inflation in fertilisers, power remain suppressed
- Lower Oct-Dec GDP growth reflects industry slowdown
- Growth slowed due to lower investment, external demand
GROWTH
- Most economy indicators show growth slowdown
- See economy performance in Jan-Mar better vs Oct-Dec
- See current account gap high on sluggish exports growth
- See current account gap high on sharp rise in crude oil prices
- Financing of current account gap to pose a challenge
- Sluggish global growth to hit growth of emerging economies
- Eurozone uncertainty, high oil prices to hit emerging economies
- Companies’ lower margins reflect difficulty in passing input price
LIQUIDITY
- CRR cut on Mar 10 needed on structural liquidity deficit
- M3, credit growth moderation reflect economy slowdown
- Liquidity has remained significantly in deficit mode
- CRR cut, OMOs infused Rs 800 billion primary liquidity
- See liquidity easing further in coming weeks
- Liquidity has improved post CRR cut, OMO bond buys
GLOBAL
- Modest improvement in global economy since Jan policy
- Recent data from US shows positive signs
- Financial market pressures in Eurozone eased to some extent
- Emerging economies slowing signs of slowdown
- Global growth in 2012, 2013 seen lower than expected
- Inflation moderated globally towards late 2011
- Subdued demand eased inflation pressures globally
- Non-fuel commodity price fall eased global inflation
- Crude oil price spike ups risk to growth, inflation
