Two days after Finance Minister Pranab Mukherjee threw a not-so-subtle hint in favour of a policy rate cut “for the sake of growth”, Reserve Bank of India Governor D Subbarao surprised the market by keeping the repo rate and cash reserve ratio (CRR) unchanged at eight per cent and 4.75 per cent, respectively.
The mid-quarter review of monetary policy, in fact, went a step further by putting the onus of bringing growth on track on the government. “Our assessment of the current growth-inflation dynamic is that there are several factors responsible for the slowdown in activity, particularly in investment, with the role of interest rates being relatively small,” it stated.
The status quo disappointed the market, which was expecting at least a 25-bp (basis point) rate cut. The Sensex, which rallied 1.4 per cent last week on the hope of a rate cut, fell 244 points after the policy announcement, while bond yields jumped. Predictably, banking and real estate stocks bore the brunt of the fall.
Industry was thoroughly disappointed. Godrej Group Chairman Adi Godrej said he didn’t understand what led to the “inaction today”. “Even the finance minister had said he was expecting a cut. It seems the central bank’s concerns are misplaced,” he said.
|PRANAB & SUBBARAO
NOT ALWAYS ON THE SAME PAGE
- On Jun 16, the FM says, “I am confident they (the RBI) will adjust monetary policy as we are adjusting the fiscal policy”
* On Jun 18, the RBI leaves rates unchanged
- On Apr 14, RBI Governor Subbarao meets the FM and the PM to discuss macroeconomic conditions
* On Apr 17, the RBI announces a 50-bp cut in repo rate; the FM says govt will complement step
- On Feb 21, the FM says tight monetary policy slowing investment and consumption growth
* On Mar 15, the RBI keeps the policy rate unchanged
- On Jan 12, the FM says if food prices continue to decline, inflation would be manageable
* On Jan 24, the RBI keeps the policy rate unchanged but cuts cash reserve ratio 50 bps
- In Dec 2011, the FM praises the RBI for managing growth-inflation dynamics
* On Dec 16, the RBI leaves the policy rate unchanged
- In Oct 2011, the FM exudes confidence India will have a high growth trajectory
* On Oct 25, the RBI raises the repo rate 25 bps
The FM says the central bank’s move would stifle growth
|Compiled by Somasroy Chakraborty
Though unintended, the monetary policy seems to have set the agenda for Mukherjee’s successor in North Block: address supply-side issues to revive growth and guard against the subsidy burden crowding out public investment. “Further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures,” the RBI said, adding its decision to frontload the policy rate reduction in April with a cut of 50 bps was based on the premise that the process of fiscal consolidation, critical for inflation management, would get under way along with other supply-side initiatives.
Mukherjee took care not to show his disappointment and said high inflation numbers might have weighed on the RBI’s decision-making process. In any case, “it was not necessary for the governor to consult the minister in the mid-quarter review,” he added.
The RBI said it would also look at the Consumer Price Index, which was in double digits. Apart from a lack of fiscal consolidation, retail inflation and the absence of a pass-through of international crude oil prices to domestic prices were the main reasons for growing inflationary expectations, the RBI said. The rupee depreciation had “significantly offset” the impact of falling global oil prices, it added.
The RBI increased banks’ limit on export credit refinance from 15 per cent to 50 per cent. That has the potential to release additional liquidity of Rs 30,000 crore, equivalent to a 50-bp CRR cut. Bankers, however, said the step might not make any material difference as the existing limit had not been used fully.