Rajan spares surprise, key rates unchanged

The RBI governor has clarified that he does not plan to go in for further tightening of rates if CPI inflation continues to move down along intended glide path

GN Bureau | April 1, 2014




For the handful of market watchers expecting another rabbit being pulled out of a hat, Reserve Bank of India governor Raghuram Rajan’s first bi-monthly monetary policy announcement on Tuesday came as a complete bummer.

In line with market expectations, Rajan decided to keep the policy rates unchanged as the existing inflationary pressures did not call for a review.

At 8 percent, the repo rate, at which banks borrow from the apex bank, remained unchanged and the reverse repo rate, at which the RBI borrows from banks, has also been maintained at 7 percent. In addition the cash reserve ratio, the amount of cash banks have to set aside with the apex bank, has also been left untouched at 4 percent.

“At the current juncture, it is appropriate to hold the policy rate, while allowing the rate increases undertaken during September 2013-January 2014 to work their way through the economy. Furthermore, if inflation continues along the intended glide path, further policy tightening in the near term is not anticipated at this juncture,” Rajan said during his announcement.

Conceding the accuracy of market predictions on the policy stance, the governor joked that “the only thing surprising about the monetary policy announcement was the lack of any surprise.”

The governor also made an important announcement that certain recommendations of the Urjit Patel committee have been adopted. These include adopting the new CPI (combined) as the key measure of inflation, transition to a bi-monthly monetary policy cycle (of which this was the first announcement), and reducing emphasis on overnight “guaranteed-access” windows for liquidity management.

On the issue of new bank licences and changes in the banking framework, Rajan clarified that the election commission nod for new bank licences was sought to ensure that the announcement would not come under any cloud of doubt and controversy. He also said that licences would be issued virtually on a tap basis to ensure more banks in the sector. With the governor mentioning differentiated licences for banks, it is also clear that he in principle agrees with the Dr Nachiket Mor panel’s recommendation for introducing payments banks. “The intent is to expand the variety and efficiency of players in the banking system while maintaining financial stability. The Reserve Bank will also be open to banking mergers, provided competition and stability are not compromised,” Rajan said.

Emphasising the urgency for a stable economic policy, Rajan said that for growth to be restored it is very important for the new government to be a stable one which should use funds on investments instead of consumption.

Industry bodies meanwhile were disappointed as they wanted Rajan to slash rates and revive growth. “At a time when growth impulses remain weak and WPI inflation has been on the declining trajectory for the last nine months, the RBI should have taken this opportunity to announce a cut in policy rates which would stimulate demand and kick-start the investment cycle. This is especially the case as deposit growth has outpaced growth in credit indicating that high cost of credit is dissuading industry from building additional capacity,” CII director general Chandrajit Banerjee said.

The next policy announcement has been scheduled for June 3. With a new and hopefully a stable government in power, Rajan can be expected to make more interesting announcements.

Comments

 

Other News

An African salient

To counter Beijing’s aggressive agenda in the Indian Ocean, New Delhi is seeking to create strategic bastions in Mauritius, Seychelles and Madagascar. The immediate provocation was China’s inauguration of its first overseas military base in Djibouti, in the Horn of Africa.

Look who’s talking ethics in Karnataka?

 Just after the UP assembly election in 1996, I was among the scores of reporters waiting at Kalyan Singh’s residence, waiting to get the first inkling of the future course of the BJP. The party had secured the maximum seats – 174 out of 425 seats – but was short of the majority mark

Company secretaries are gatekeepers of corporate governance: SEBI Chairman

“Company Secretaries, once known as secretaries to the board and management, have transformed themselves into key managerial and governance professionals. Today they are recognised for their importance on corporate landscape and have become gatekeepers of corporate governance,” said Ajay Tyagi,

Will there be light at the end of the tunnel?

Any good news which promises to bring about qualitative improvement in the lives of people, especially in rural India, is always welcome. It was heartening indeed to learn that every single village in the country now has access to electricity, as announced by the prime minister on April 29. This is most ce

A dry run in Bundelkhand

The paved road, the few concrete houses and men on motorcycles – these are deceptive signs of development in Madralalpur village. Only a couple of weeks ago, Babu, a 47-year-old distressed farmer, had hanged himself from a babool tree. Villagers were gathered at his house as his wife, mother, sister-

Our jobs, their jobs

Statistics has come a long way from the time when British prime minister Benjamin Disraeli observed: “There are three kinds of lies: lies, damned lies, and statistics.” Statistics is now an accredited branch of applied mathematics; statistical methods are routinely used to prove or disprove the

Current Issue

Current Issue

Video

CM Nitish’s convoy attacked in Buxar

Opinion

Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter

Twitter