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The Reserve Bank of India (RBI)’s status quo on the policy rate at Tuesday’s monetary policy review meeting didn’t surprise many within India Inc. “For RBI, inflation is paramount,” said A Issac George, chief financial officer at Hyderabad-based infrastructure group GVK. “I did not expect a rate cut this time. You have to give them more time.”
Prabal Banerjee, president (international finance), Essar Services, said, “I believe…RBI’s steps of maintaining status quo without much exuberance is the right approach at this point.”
However, for rate-sensitive sectors such as real estate, the delay in a rate cut is becoming painful. “Every industry in India wants the rate to be cut,” says Rajeev Talwar, executive director at DLF. “Certainly, there is disappointment with the status quo.”
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“The growth we need cannot happen at the current policy rate,” said Siddhartha Roy, economic advisor at Tata Group. “We are hoping next time RBI will take it into consideration.”
At the monetary policy review meeting, RBI Governor Raghuram Rajan said, “There are risks from food price shocks as the full effects of the monsoon’s passage unfold and from geopolitical developments that could materialise rapidly.” He added “uncertainties” pertaining to food inflation remained.
While wholesale inflation has shown a substantial drop, retail inflation is still stubbornly high — about eight per cent. Also, while food inflation has shown an improvement at the Wholesale Price Index-level, Consumer Price Index-based food inflation, at 9.5 per cent, is still high. And, credit growth has fallen below 10 per cent.
However, RBI can take comfort from two key factors — one, Brent crude oil has fallen from $107 a barrel at the beginning of the year to $97 a barrel. Second, due to substantial inflows from foreign institutional investors (FIIs), the exchange rate has been reasonably steady during the past six months.
But there are impending risks for emerging markets, especially India. First, the geopolitical environment in West Asia could flare any time, reversing Brent crude oil prices and affecting an import-intensive economy such as India’s. This would lead to a huge oil cost burden and, consequently, a spurt in inflation. Second, a rise in US Federal Reserve rates could reverse FII inflows, leading to rupee depreciation.
Business chambers expressed disappointment at RBI’s decision to opt for status quo on the policy rate. “By all indications, the twin deficits—fiscal and current account—are well under control and core inflation has been trending downwards. On the other hand, industrial production has been muted. This could have been a good opportunity for RBI to reduce rates,” Chandrajit Banerjee, director-general of the Confederation of Indian Industry.
“The infusion of liquidity at this juncture, through a reduction in policy rates, would have provided an impetus to the feel-good factor brought on by the recent burst of policy announcements by the government,” he added.
Rana Kapoor, president of the Associated Chambers of Commerce and Industry, said, “With crude oil prices having come down significantly and showing further prospects of reduction, and commodity prices in the global market seeing a downward trend, RBI wouldn’t have taken any inflationary risks if policy interest rates were eased a bit, signalling accommodation for boosting growth… In fact, at this point, the macro picture is ripe for policy accommodation for growth.”
A Didar Singh, secretary-general of the Federation of Indian Chambers of Commerce and Industry, said, “As projects come on stream and the industrial economy starts moving, there will, hopefully, be greater demand for credit. While we fully appreciate the measures taken by RBI in maintaining adequate liquidity in the system, I would like to mention the viability of fresh investments is impacted by many factors, including the cost of credit.”
