Proving speculations correct, the reserve bank of India (RBI) on Tuesday left the key interest rates unchanged and lowered its growth forecast for the current fiscal as the economy refuses to show any significant signs of improvement. The move, the central bank claims, will help in maintaining macroeconomic stability and keep inflationary pressures at bay.

The central bank kept the repo rate and the cash reserve ratio at their previous levels of 7.25 percent and 4 percent respectively. Further, it revised the growth forecast downwards from the current level of 5.7 to 5.5 per cent.

“Based on an assessment of the present and prospective macroeconomic situation, we have decided to keep the policy repo rate….. as also the cash reserve ratio (CRR) unchanged,” the RBI governor D Subbarao said while announcing the first quarter policy of the 2013-14 fiscal.

As the domestic economy continues to be impacted by both external and internal pressures, the governor admitted that the liquidity tightening measures that have been introduced in the recent times are absolutely necessary and will be eased as the situation improves.

“India is currently caught in a classic ‘impossible trinity’ trilemma whereby we are having to forfeit some monetary policy discretion to address external sector concerns. The liquidity tightening measures instituted by the Reserve Bank over the last two weeks are aimed at checking undue volatility in the foreign exchange market. They will be rolled back in a calibrated manner as stability is restored to the foreign exchange market, enabling monetary policy to revert to supporting growth with continuing vigil on inflation,” he said.

A day earlier, the central bank, in a report, had urged the government to immediately bring in structural reforms to make India an attractive destination for foreign and domestic investors and the governor reiterated this during the announcement today.

Attempting to minimise the severity of the impact of slow and uneven global growth, subdued industrial activity and an unstable currency, the government had introduced a slew of measures including — increasing, and in some cases removing, foreign direct investment (FDI) caps in various sectors— in the last few days.

Analysts, who had been speculating that the RBI would leave the monetary rates unchanged, acknowledged that the move was necessary to check the various risks the economy was facing but warned the government to pay immediate attention to the central bank’s revised growth forecasts.
“We understand the decision of the RBI on the rates. We draw heart from the statement of the RBI saying that had it not been for the volatility, the rates could have been reduced, since inflation has started to moderate. We see this as a softening of stance by the RBI,” said Kris Gopalakrishnan, co-chairman of Infosys and president, CII.

He further said, “However, the moderation of growth outlook by the RBI is a matter of great concern and this enforces our view that actions on multiple fronts are required to help the economy revive. CII hopes that in the forthcoming session of parliament, some of the key legislations would get enacted which would send out the correct messages to investors at home and abroad.”

Echoing the sentiment, the research team at HDFC Bank welcomed the central bank’s decision to leave the rates unchanged and said that it “put a somewhat anxious market (sections of which had not entirely ruled out the possibility of a rate hike) at ease”.

On the downward revision of the growth prospects, the team said that it was high time that the government and other institutions took the economic crisis seriously and initiated urgent measures to deal with it. “In our view, the downward revisions only indicates a growing acceptance by the RBI that the slowdown in growth is perhaps more serious than initially anticipated. It follows then that the central bank is likely to accord more importance to supporting growth going ahead once there is more stability in the currency markets,” it said. 

Meanwhile, the governor has exuded confidence that if quicker reforms are put in place, the country can reverse the slowdown and bounce back on the high growth track. However, with the economy operating on a broken wing and a prayer, the government and its institutions need to show a little more than just faith to ensure a smooth flight. All the rules and controls are in place, taking-off immediately is the key.