JOIN USThat the sharp rupee depreciation of nearly 7 per cent since May, doddering markets, high consumer price inflation, and measly 2.3 per cent growth in industrial output make for good reasons to maintain status quo on interest rates is a no-brainer.
There was hope that RBI’s ‘inflation governor’ would accomplish a 20-25 basis point cut in cash reserve ratio, or the amount of cash which banks maintain with RBI, as this would have unlocked over Rs 10,000 crore of credit into the market. But part of the apex bank’s hawkish stance stems from high retail inflation which has prevented earlier rate cuts from being transmitted to borrowers. The rupee has not seen much upside either, which RBI justifiably fears will push up inflation – and make it difficult to lower repo rates in the July policy review.
RBI has been in-situ biased in favour of reining in inflation vis-à-vis stimulating growth, for rate cuts aggregating to 75 basis points this year have not buoyed investor sentiments, save for a brief uptick in manufacturing output and fall in non-food manufacturing inflation. Even wholesale inflation at 4.7 per cent in May was the outcome of weakening consumption and diminishing corporate purchasing power. If June brings further progress on inflation containment and the monsoon fulfils its promise, RBI will be better positioned to accord an investment stimulus in July. The fact remains that lending rates remain high in the corporate sector, while non-food credit in a time of need remains elusive. Credit to the farm sector, which picked up in the initial months of 2013, is currently moving up in single digits. The stress on the rupee remains with capital flows not resuming. The inflationary implications of minimum support prices and food imbalances toted up against an uncertain demand situation are key factors on which the jury is still out.
The inflation outlook remains clouded in the face of volatility in portfolio inflows and further risks to CAD financing. Huge outflows have plagued the debt markets over the past month, and RBI has rightly figured that a rate cut could exacerbate the situation. Come July, RBI will have its options open to fulfil the working capital demands of an industry caused by falling pricing power, lack of demand, tight liquidity cycles and extended credit periods. Provided further steps are taken to control inflation by the government, where scanty evidence is visible on the ground, RBI has a good case to put a rate cut on the backburner.