Expert views on RBI policy

 

The Reserve Bank of India (RBI) kept interest rates unchanged as expected on Monday after cutting them in each of its previous three policy reviews, warning of upward risks to inflation posed by a falling rupee and increases in food prices.

 

The RBI also called for vigilance over global economic uncertainty, citing the risks of a reversal of capital flows from emerging markets. Such outflows would exacerbate the country's high current account deficit.

 

The repo rate remains at 7.25 % and the cash reserve ratio (CRR), or the share of deposits banks must keep with the central bank, stays at 4.00 %, despite falling inflation in recent months.

 

COMMENTARY

Chandrajit Banerjee, Director General, CII: " “The decision of the RBI to hold policy rates on status quo is disappointing. At a time when both growth and inflation dynamics call for an accommodative monetary policy, the RBI has taken a cautious approach of attending to the prospect of a possible resurgence in inflation over reviving growth in the economy”,  he added.
 

Rüpa Rege Nitsure, Chief Economist, Bank of Baroda, Mumbai: "The RBI continues to remain very hawkish. It has clearly said external sector imbalance has been weighing on its decision. And this is the key message that maximum weightage will be given to external sector position going forward."At this stage, the RBI didn't have much room to do any action despite accentuated risks to growth. But I am not expecting action in July because I think after the monsoon is over, the RBI will make an assessment of monsoon, its normalcy and impact on food prices. I expect action on rates only in the second half of the year."

Anjali Verma, Economist, Phillip Capital, Mumbai: "I still expect 25-50 basis points of repo rate easing in the rest of the financial year. The timing will be based on the currency movement as it will have an impact on inflation and the current account deficit. Capital inflows are also an important variable the RBI will watch out for."

 

A. Prasanna, Economist, ICICI Securities Primary Dealership Ltd, Mumbai: "I still think there is a possibility of a rate cut in July based on inflation views and on expectation that the currency markets will stabilise post the FOMC meeting this week. But if the volatility continues and the rupee continues to weaken, then we will review the call. However, the risks of no action in July have increased going by the statement from the RBI.But if the current trajectory of CPI continues, there could be one more rate cut going forward."

 

 

Background

 

A slump in the rupee to record lows and the risk of potentially destabilising capital inflows have complicated the task for the RBI to loosen policy despite softening inflation and a decade-low economic growth.

 

Finance Minister P. Chidambaram pledged last week new reform measures by the end of June including lifting caps on foreign direct investment and changes in locally-produced gas prices to win back investor confidence. The rupee slumped to a record low of 58.98 per dollar this week, adding to concerns about the prospects of a recovery in Asia's third largest economy.

 

 Industrial output in April grew 2.3% from an upwardly revised 3.4% in March, while the wholesale price index in May rose an annual 4.7%, the lowest in more than three years.

 

Annual consumer price inflation slowed for the third straight month in May to 9.31%, but it was higher than market expectations and a weaker rupee could accelerate price pressures especially because India relies heavily on crude oil imports.