RBI keeps status quo; interest rates unlikely to ease

Dashing hopes of further interest rate cuts in home, consumer and auto loans by lenders, the Reserve Bank today kept the key rates unchanged.

In its quarterly review of annual monetary policy, the apex bank also indicated at signs of economic recovery but retained its earlier projection of 6 per cent expansion with an upward bias for the current financial year.

RBI earlier in April forecast about 6 per cent growth.

Warning that high fiscal deficit poses a challenge for the government, the apex bank also hinted at negative signs like deficient monsoon, food price inflation and weak demand.

Bankers said interest rates will remain same in the near future and may even harden post-October, with the credit picking up in the busy season.

"They (RBI) have done what they are supposed to do at this point of time. I think the interest rates will remain same (in the immediate future)," Bank of Baroda's Chairman and Managing Director M D Mallya said.

Projecting a growth of six per cent with an upward bias for the current fiscal year, RBI said the challenge would be to return to the high growth of 9 per cent.

Noting that the negative inflation is transitory and will not stay beyond a few more months, the RBI forecast wholesale price based rate of price rise to go up to five per cent by this fiscal-end.

The immediate challenge for the RBI will be to balance the short term compulsion of managing the ample liquidity and the potential build up of inflationary pressures on the way forward, it said.

The Reserve Bank also listed four other major challenges — managing the government borrowing programme, spurring private investment demand, returning to the path of fiscal consolidation and improving investment climate.

To manage the government borrowing without crowding out private credit demand, RBI would continue with its active liquidity management policy, it said.

During the first-half of 2009-10, planned open market operation purchases and market stabilisation scheme unwinding will add primary liquidity of Rs 1.5 lakh crore, which by way of monetary impact was equivalent to a reduction of CRR by 3.5 per cent, the RBI said.

The apex bank would also meet the challenge of spurring private credit demand by maintaining policy rates and meeting liquidity conditions conducive for its revival, it said.

The large and abrupt increase in the government borrowing has led to hardening of yields on government securities, impeding monetary transmission, the RBI said.

So, continuation of large fiscal deficit beyond the recovery period can crowd out private investment and trigger inflationary pressures, it said.

The government will, therefore, need to return to the path of fiscal consolidation, it said.

Quoting its survey, the RBI said that inflation expectations remain well-anchored now but the rate of price rise is expected to rise in the next three-month to one-year time.

Keeping in view the global trend in commodity prices and domestic supply-demand, wholesale price based inflation is projected to be around five per cent by end-March 2010 which is higher than the projection of four per cent made in the annual policy statement.

The monetary policy will continue to condition and contain inflation in the 4-4.5 per cent range with a medium-term objective of three per cent, RBI said.

The YoY growth on money supply has remained at 20 per cent throughout the current fiscal, reflecting easy liquidity conditions, it said.

Elaborating on signs of economic recovery in the country, RBI said that foodstocks have increased, industrial production has turned positive, corporate performance has improved and business confidence surveys are optimistic.

Besides, leading indicators show an upturn, interest rates have declined and credit offtake has picked up and stock prices have rebounded, it said.

But there were some negative signs, including delayed monsoon, food price inflation, rebound in global commodity prices, continuing weak external demand and high fiscal deficit, it said.

On balance, the risk to the current projections to the real GDP growth and inflation were on the upside, the apex bank said.