Comments
The Reserve Bank of India, facing flak from industry for stifling growth through its tight monetary policy in an attempt to curb inflation, acted on expected lines and left key rates unchanged.
The stock markets, however, were not too happy, with the benchmark BSE Sensex falling 345 points, or a little over 2 per cent, to 15,491.35 points, its lowest in almost two years, on a day when the rupee recovered smartly against the dollar.
In its mid-quarter monetary policy review today, the RBI indicated that it may now shift gears and cut rates, responding to the risks to growth. Growth is back on centre-stage as inflation shows signs of moderation. The repo rate remains at 8.50 per cent and the cash reserve ratio at 6 per cent. Banks are unlikely to change their deposit and lending rates.
It was widely expected that the central bank would take a breather after upping interest rates 13 times in the last 21 months to stanch rising inflation. Since March 2010, cumulatively, the RBI raised the interest rate at which it lends to banks (repo rate) by 375 basis points to 8.50 per cent.
GDP growth
Slowdown in GDP growth (6.9 per cent in the July-September period versus 8.8 per cent in the year-ago period), a sharp 5.1 per cent year-on-year decline in industrial production, and moderation in inflation to 9.1 per cent in November from 9.7 per cent in October may have prompted the RBI to refrain from tightening interest rates.
The RBI statement said, “On the domestic front, growth is clearly decelerating…..The growth deceleration is contributing to a decline in inflation momentum, which is also being helped by softening food inflation…While inflation remains on its projected territory, downside risks to growth have clearly increased.”
Though a cut in the cash reserve ratio (a portion of deposits that banks have to park with RBI) was expected, the RBI kept this key monetary policy tool unchanged, seeing no significant signs of stress in the money market.
The central bank's pessimism on growth seems to have affected the stock markets that started falling around 1-30 p.m. Some analysts attributed the fall also to a written reply in Parliament by the Union Minister of State for Finance, Mr Namo Narain Meena, that the Finance Ministry had received information on 10 suspected instances of terrorist financing using the stock exchanges in the last three financial years.
“A statement from the Minister of State for Finance that there have been instances of terror financing entering the capital market and should be investigated affected sentiment,” said Mr Arun Kejriwal, Founder, KRIS Research.
A large number of stop-loss positions were triggered on rumours of sell-off by FIIs.
According to Mr M.D. Mallya, CMD, Bank of Baroda, and Chairman, Indian Banks' Association, “Corporates can draw comfort from the RBI's ‘no hike' stance and step up their borrowing and planning for expansion, which was missing in the recent past because of the uncertainty. Given these sentiments, it is reasonable to expect that 18 per cent credit growth for this year can be achieved.”
Comments
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.