Raghuram Rajan surprises everyone yet again; leaves rates unchanged

Published Dec 18, 2013, 9:18 pm IST
Updated Mar 19, 2019, 1:04 am IST
Reserve Bank of India (RBI) Governor Raghuram Rajan smiles during a news conference at the RBI headquarters in Mumbai on Wednesday. -AP
 Reserve Bank of India (RBI) Governor Raghuram Rajan smiles during a news conference at the RBI headquarters in Mumbai on Wednesday. -AP

Mumbai: In a surprise relief to borrowers, Reserve Bank left key policy rates unchanged on Wednesday, but said it will hike interest rates if inflation does not subside in line with the expected declining trend.

"If inflation in food and fuel do not fall, RBI will act on off policy date," RBI Governor Raghuram Rajan said soon after unveiling the mid-quarter review of monetary policy.

RBIhas kept short-term lending rate unchanged at 7.75 per cent, while the cash reserve ratio (CRR) remained at 4 per cent.

The next policy review is due on January 28. Noting that current inflation is too high, he said, "given the weak state of economy, the inadvisability of overly reactive policy action, as well as the long lags with which monetary policy works, there is merit in waiting for more data to reduce uncertainty."

"There are obvious risks to waiting for more data, including the possibility that tapering of quantitative easing by the US Fed may disrupt external markets and that the Reserve Bank may be perceived to be soft on inflation," he said, adding, the central bank will remain vigilant.

Since taking over as theRBI chief in September, Rajan had increased the key rate by 0.50 per cent in two instalments.

The status quo decision came as a surprise as only last week the RBI had pulled up banks for not helping it in monetary policy transmission.

The decision to keep rates unchanged will be a big breather for the industry and retail borrowers in particular as the markets had expected another 0.25 per cent hike in the short-term lending rate.

SBI Chairperson Arundhati Bhattacharya said the bank would not contemplate cutting deposit rates as "it really hurts the depositors and we would not like to do that. Our rates are still higher than what it was on July 15, I see no immediate rate cut."

Shifting his stance from inflation management, Rajan said continuing weakness in economic growth was the main driver of his policy action.

Enthused by the policy announcement, the stock markets reacted positively.

The S&P BSE Sensex climbed for the first time in seven days, reaching the day's high of 20,917.57, a rise of 305 points from Tuesday's close.

Bank of India Chairperson V R Iyer said there is no room for cutting lending and deposit rates at the moment.

"Inflation is very high and there is hardly any scope for us to reduce the interest rate on deposits, at least at the year end.

Absolutely, we will not be able to do that at the moment. But the bulk deposit rate we will be able to take a call and reduce the rate," Iyer said.

"Immediately, there will not be any room for us to reduce the base rate," she added.

Commenting on the policy, Prime Minister's Economic Advisory Council (PMEAC) Chairman C Rangarajan said: "It is a difficult balancing act...I certainly think that the priority to RBI is price stability and therefore they should keep continuous watch on what is happening to inflation."

While retail inflation soared to a nine-month high of 11.24 per cent in November, the index based on wholesale prices zoomed to a 14-month high of 7.52 per cent last month.

Factory output shrank 1.8 per cent in October, the first contraction in the Index of Industrial Production (IIP) in four months.

Analysts are of the opinion that inflation has peaked and will ease from December as food prices cool on better supplies with winter crops coming in.

Talking about the economy, Rajan said, growth is set to improve in the second half of this financial year on the back of expansion in the agriculture sector, exports and movement in stalled projects.

GDP growth in the second quarter of this financial year came in at 4.8 per cent after a reading of 4.4 per cent in the first quarter, resulting in a 4.6 per cent expansion in the first half.

Welcoming the RBI's status quo decision, the Confederation of Indian Industry (CII) said prices of food items would moderate and with the rupee stabilising, there should be no sudden increases in fuel prices.

"To some extent, that obviates the need for further monetary tightening. Therefore, the RBI has demonstrated restraint and foresight to strike the right balance between inflation and growth," it said.

There was a massive improvement in the current account deficit (CAD), which narrowed to 1.2 per cent of GDP in the second quarter after a steep decline in gold imports.

The CAD was 4.9 per cent of GDP in the first quarter (April-June). "I would be much happier if we had the kind of CAD we have without significant curbs on anything, including gold.

We should aim to have a CAD without any distortions, removing the incentives for smuggling, that is what we will be working for," Rajan said at a press conference.

The CAD, which is the excess of foreign currency outflows over inflows, had touched a record high of USD 88.2 billion, or 4.8 per cent of GDP, in the previous financial year.

The government hiked import duty on gold to 10 per cent and the RBI also imposed curbs on inward shipments of the metal by linking them to exports, helping to narrow the CAD.

In the first half of 2013-14, the CAD stood at USD 26.9 billion (3.1 per cent of GDP), compared with USD 37.9 billion (4.5 per cent of GDP) in the first half of 2012-13.

"At this point, I feel very comfortable with where we are on CAD," Rajan said. The government and the RBI expect the CAD to be contained at USD 56 billion this year. 



More From Other News