Signalling downward bias, RBI maintains status quo on interest rates

The Reserve Bank of India (RBI), on Thursday, — a day prior to Union Budget 2012-13 to be presented in the parliament — has decided to leave key policy rates untouched citing the prevailing high fiscal deficit and rising crude oil prices.

With this ‘Mid-Quarter Monetary Policy Review,’ the apex bank has not cut key policy rates for more than two years.  During this period, the repo rate at which banks borrow money from RBI has gone up by 3.5 to 8.5 per cent.

On the basis of the current macroeconomic assessment, RBI said it has decided to keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.75 per cent of their net demand and time liabilities, while repo rate under the liquidity adjustment facility (LAF) unchanged at 8.5 per cent.

Consequently, the reverse repo rate under the LAF will remain unchanged at 7.5 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 9.5 per cent.

Further, RBI said it needed more clarity on the government’s fiscal roadmap, which has been in complete disarray so far. The government is poised to miss this fiscal year’s deficit target of 4.6 per cent of GDP by a wide margin. Notwithstanding the slowing growth, RBI said, inflation risks still remain and to curtail that a credible fiscal consolidation is vital.

“Growth and inflation dynamics shows no tightening is needed. Further actions will be towards lowering rates,” the central bank said.

In its guidance, RBI also said recent growth-inflation dynamics have prompted it to indicate that no further tightening is required and that future actions will be towards lowering the rates.

Inflation has firmed up to 6.95 per cent in February from 6.55 per cent in January. Also, the rising crude oil prices to $125 a barrel indicates further hike in inflation.  The country’s factory output (IIP) grew its fastest in seven months in January, powered by a surge in manufacturing including consumer non-durables.

Inflation under check

Analysts and economists believe the RBI will wait until at least April before deciding on cutting rates, until it is clear that inflation is under control. In this context, Nomura India said:  Even though slow growth warrants monetary easing, the RBI decided otherwise as upside risks to inflation have risen due to higher crude oil prices, fiscal slippage, rupee depreciation and continued suppressed inflation. Its forward guidance is also neutral. As such, the RBI did not commit to a rate cut in April and has kept the option not to act open.”

Last week, RBI slashed CRR (cash reserve ratio) from 5.5 per cent to 4.75 per cent. CRR is the portion of NDTL (read, total deposits) that banks have to mandatorily keep with the regulator. RBI maintained it was necessitated ahead of this scheduled Mid-Quarter Review to address the persistent structural liquidity deficit beyond the RBI’s comfort level, which would have further worsened during the week of March 12-16 due to advance tax outflows.

With this, RBI had infused Rs 48,000 crore into the economy and it was the second reduction in the CRR since the January 24 policy announcement, when it had slashed CRR by 50 basis points releasing Rs 32,000 crore into the system.  It expects liquidity situation to ease further in weeks ahead. However, the apex bank expects current account deficit to remain at elevated levels.