There are three reasons why there was actually no need for the RBI to cut the rates this time.
First, the retail inflation indicated by the consumer price index has shot up to 4.62 per cent, well above the RBI target ceiling of 4 per cent. This would require caution. But the component that has affected the price level is fruit and vegetable prices. This is considered a seasonal factor and its impact may wane off over the next one or two months. But it is a bit worrisome that the prices of fruit and vegetables remain elevated and in some cases it is too high that it may not come down too soon. And this would mean that the impact on CPI may be longer than expected.
Second, the rupee is weaker today that it was three months ago. A weaker rupee is akin to lower interest rates. Since the rupee is expected to be weaker from here a cut may not be the best thing to do at this juncture since effective lower rate is already established with a weaker rupee.
Third, the liquidity in the interbank market and the systemic liquidity are in surplus and there is sufficient liquidity to see the auctions go through smoothly. The liquidity conditions ensure that rates, especially at the short end of the curve, remains low. This is what is actually achieved by a repo rate cut, too. Therefore, a cut was not required at this juncture.
(The author is Head of Research, Emkay Wealth Management)
