The Reserve Bank of India has stuck to its cautious monetary stance by keeping the policy rates unchanged in its bimonthly review, the first in the new financial year.
This was generally expected, though some sections of the industry had hoped for a cut in the repo rate, hamstrung as they are by the high interest regime of the last many months. It has kept the repo rate at 8 per cent and refrained from raising it. The fact that it has not hiked it may be an acknowledgement of the moderation in consumer price inflation, which has fallen from 11.2 per cent in November 2013 to 8.1 per cent in February. But the apex bank did not consider this was enough to soften its position as the rate is still above its target.
The bank has strong reasons to support its stance. It has always considered that its responsibility to fight inflation is above all others and used the monetary tools at its disposal for this objective. It has accepted the inverse relationship between economic growth and inflation but was never convinced of the argument that loosening the interest regime is the first requirement to spur growth. The present moderation in the inflation rate cannot be considered stable because it has come on the back of a softening of the food prices. This trend may not continue in the coming months because food prices can again rise if this year’s monsoon is below par.
Moreover, the core inflation rate is still high if food and fuel prices are excluded. Other factors like the minimum support prices for crops, the fiscal policy of the next government and its decisions on subsidies are all likely to have an impact on inflation. The RBI has to take a medium, if not long, term view of these uncertain factors and so it has played safe with its policy. In fact, it has indirectly but effectively increased the interest rates by reducing the banks’ less expensive borrowals from its repo window.
With this policy posture, the RBI has again indicated that the conditions for faster economic growth have to be created by the government. It does not see any major improvement in the GDP growth during the current year and has projected only a marginal increase from the present 5 per cent to about 5.5 per cent. Therefore, much will depend on the policies of the next government and the global economic situation.