RBI sticks to rates; banks say no to interest cut
Brushing aside global signals and concerns around Re appreciation, RBI has left the CRR, repo and reverse repo rates unchanged. Should RBI have cut rates? Write in
By INDIATIMES NEWS NETWORK |
NEW DELHI: The Reserve Bank Governor Dr Yaga Venugopal Reddy has held his ground and has kept all the key interest rates unchanged.
The cash reserve ratio stays and the CRR repo and reverse repo rates as well as the bank rates remain unchanged. The policy actually leaves flexibility to change repo and reverse rates in the near future.
The Reverse repo rate stays at 6 per cent and CRR at 7.5 per cent. The inflation target for 07-08 also remains at 4 to 4.5 per cent levels and 3 per cent in medium term.
Moving away from the hawkish stance of the previous policy, RBI’s third quarter credit policy review unveiled on Tuesday, is driven by liquidity management and move to maintain price stability.
GDP forecast for FY-08 has been set at 8.5 per cent.
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The rationale behind RBI's stance this time is that too much liquidity in the market can ignite inflation, especially around the expectations of a rise in food and fuel prices globally, in the near future. Inflation is expected to go up even if fuel rates remain unchanged."Developments in global financial markets in the context of the subprime crisis would warrant more intensified monitoring and swift responses with all available instruments to preserve and maintain macroeconomic and financial stability," the RBI statement said.
Falling U.S. interest rates have raised the prospect that yield-seeking flows into Indian markets might continue to complicate monetary and currency management by pushing the rupee up and making exports less competitive. "Financial markets continue to warrant careful and continuous monitoring with a readiness to respond flexibly and pre-emptively to ensure orderly liquidity conditions, particularly in the context of the management of volatile and large movements in capital flows," it said.
Interestingly, while the financial markets warrant careful monitoring on large forex flows, market sources have not ruled out likely forex flows reversal on global sentiment.
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Reddy has rapped the banks on the knuckles for not lowering rates despite easy liquidity conditions and the fact that credit has moderated.Even though the industry feels that post the announcement of the policy, banks may re-price lending and deposit rates, the softening of the interest rates may not happen before next quarter.
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“Usually most banks see hardening of rates in the last quarter (Jan-Mach) of the year, but the fact that it has not happened this year means that banks have taken into account the liquidity positions. RBI’s response is a measured one given the uncertainties in the global. It has to take note of inflation but at the same time it also has to keep liquidity in mind. Most banks will watch their liquidity positions in the February-March timeframe and go in for interest rate re-structuring only in the next quarter,” said Chanda Kochhar, Joint Managing Director, ICICI Bank.The rupee stood at 39.39/40 per dollar, holding steady after the Indian central bank's decision, while the yield on the 10-year benchmark bond rose 2 basis points to 7.52 per cent.
Given the RBI’s decision to leave the rates untouched on Tuesday, the interest rate differential between India and the United States widened to 4.25 percentage points, its widest in three years, after the Fed slashed the fed funds rate last week. The Fed is also expected to make a further cut in rates on Wednesday.
The overall stance of monetary policy ahead will continue to be:
1 to reinforce the emphasis on price stability and well-anchored inflation expectations while ensuring a monetary and interest rate environment conducive to continuation of the growth momentum and orderly conditions in financial markets.
2 to emphasise credit quality as well as credit delivery, in particular, for employment-intensive sectors, while pursuing financial inclusion.
3 to monitor the evolving heightened global uncertainties and domestic situation impinging on inflation expectations, financial stability and growth momentum in order to respond swiftly with both conventional and unconventional measures, as appropriate.
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