Central bank retains repo rate at 7.25% and cash reserve ratio at 4% as governor Subbarao hopes for stability in domestic economy; CII, FICCI, call move ‘disappointing’
With the rupee languishing, investments taking a backseat and deficit levels refusing to come down significantly, the Reserve Bank of India (RBI) on Monday decided to keep the interest rates unchanged. The move, the apex bank hopes, will help bring about some stability in the domestic economy at a time uncertainty looms large across global economies.
The central bank retained the repo rate (rate at which RBI lends to commercial banks) at 7.25 percent, thus pouring cold water on hopes of easing interest rates. Further, the cash reserve ratio (portion of deposits which commercial banks have to keep with RBI) will remain 4 percent.
While announcing the monetary policy review, RBI governor D Subbarao pointed out, “The monetary policy stance has been informed by the evolving growth-inflation dynamics, the balance of risks as well as recent developments in the external sector.”
Last week, the rupee hit an all-time low of 58.98 to the dollar as more and more investors sold the currency. A high current account deficit and lack of government initiatives to attract investments has left the investors worried, thus triggering the bulk sell-off.
In addition, Subbarao said that global growth has been “patchy and uneven”. While the US and Japan showed some signs of improvement, the Eurozone continues to struggle, as a result of which domestic demand has not been able to take off, he said.
Sounding cautious on the present economic environment in India and across the globe, Subbarao said the RBI needed to be watchful and take necessary steps as and when required in response to the continually changing risk perceptions of investors and their impact on capital inflows and outflows.
High interest rates have led to declining demand for loans and negatively affected loan repayments and thereby impacting the financial health of banks of late.
On Sunday, State Bank of India chairman Pratip Chaudhuri had said that the bank was ready to cut lending rates either if the cash reserve ratio (or CRR) was slashed or if the apex bank paid interest to the banks on these deposits.
Experts concerned
Meanwhile, analysts, most of whom had predicted the RBI’s stance, are concerned about the impact of the move on a subdued investor sentiment.
Naina Lal Kidwai, country head, HSBC, and president, FICCI, said: “Given the depreciation seen in the value of the rupee in recent past, the decision of RBI to put on hold any further rate cut was not totally unexpected. With some of the earlier concerns like inflation, negative IIP growth slowly receding, and performance of the monsoon being reassuring, the situation does appear to be improving and it is hoped that investment is in high focus as it needs a boost to trigger growth.”
Chandrajit Banerjee, director general, confederation of Indian industry (CII) said: “The decision of the RBI to hold policy rates on status quo is disappointing. At a time when both growth and inflation dynamics call for an accommodative monetary policy, the RBI has taken a cautious approach of attending to the prospect of a possible resurgence in inflation over reviving growth in the economy.”
However, analysts have shown optimism of a possible rate cut in the July monetary policy review as the present move should be able to soothe inflation worries. “Given the present situation, this is the best the RBI could have done as there is a lot of strain on the economy owing to the persisting current account deficit (CAD). However, there is a strong possibility of a rate cut by around 25 basis points in the next review if we are able to perform better on the exports front as the government has taken necessary steps to discourage imports especially that of gold and this should lower the CAD.”