Lower retail inflation and an upgrade in India’s outlook by S&P did not sway the Reserve Bank of India into cutting policy rates.
In its fourth bi-monthly policy review, the RBI remained steadfast in its battle against inflation.
This is the fourth time in as many bi-monthly policy reviews that the repo rate (or the interest rate at which RBI provides short-term liquidity to banks) has been unchanged at 8 per cent.
The RBI reasoned that there are risks from food price shocks as the full effect of the monsoon’s passage unfolds and from geopolitical developments that could materialise rapidly.
The central bank also left the cash reserve ratio (CRR) or the slice of bank deposits parked with it unchanged at 4 per cent of deposits.
With no change in either the policy rate or the CRR, and credit growth lagging deposit growth, bankers don’t expect any change in the deposit or lending rates.
“We have been pragmatic and the medicine (anti-inflationary monetary policy) seems to be working. The problem is before the patient (the economy) has run the full course of the medicine, you (industry) want to take him off the medicine and say let us take a chance. That is always the danger in Indian policy. We have to have the discipline to stay the course,” RBI Governor Raghuram Rajan said at a post policy conference.
Since June, headline inflation has ebbed to levels which are consistent with the desired near-term target of 8 per cent by January 2015.
“The most heartening feature has been the steady decline in inflation excluding food and fuel, by a cumulative 111 basis points since January 2014, to a new low. With international crude prices softening and relative stability in the foreign exchange market, some upside risks to inflation are receding,” RBI said.
Dovish tone According to Arundhati Bhattacharya, Chairperson, State Bank of India, “This time, the tone of the policy seems to be dovish compared to the tone of the policy in April. If you see the fan chart also, it shows that the risks (to inflation) are more on the downside than the upside risk. Overall, the one takeaway is that there are dis-inflationary trends that are now getting entrenched.”
On growth, RBI said the momentum of activity in all sectors of the economy is yet to stabilise.
“Agriculture should shed the effects of recent shocks and pick up in Q4 (January-March) this fiscal year….The key to a turnaround in the growth path of the economy in the second half of the year is a revival in investment activity – in greenfield as well as brownfield stalled projects – supported by fiscal consolidation, stronger export performance and sustained disinflation.
“With expectations of these conditions remaining broadly unchanged, the projection of growth for 2014-15 is retained at 5.5 per cent within a range of 5 to 6 per cent around this central estimate. The quarterly growth path may slow mildly in Q2 and Q3 before recovering in Q4.”
Outlook On inflation, Rajan said, as of now, it is reasonably set. “Our expectation is that we can reach the target (of retail inflation of 8 per cent by January 2015) but a lot can happen in the world… But there are also positives and we have to see how it will play out,” he observed.