RBI holds repo rate, CRR; flags inflationary fears
'May inflation at 10.36% left no room for RBI'

Economy Jun 18, 2012

Is RBI being too cautious by keeping rates unchanged?

The RBI left interest rates and the cash reserve ratio for banks unchanged on Monday, defying widespread expectations for a rate cut as it warned that doing so could worsen inflation.

The Reserve Bank of India kept its policy repo rate unchanged at 8 percent and left the cash reserve ratio for banks at 4.75 percent.

Below are the reactions to the RBI's policy:

LEIF ESKESEN, CHIEF ECONOMIST FOR INDIA AND ASEAN, HSBC, SINGAPORE

"It was the right decision from the Reserve Bank of India's perspective because a significant portion of the slowdown in growth is because of supply constraints, and a cut in monetary policy rates or even the cash reserve ratio is not going to make much impact on growth.

The RBI clearly surprised the market by not cutting either CRR or the repo rates. Reuters

"In addition to that, inflation remains high and there are risks when it comes to the inflation outlook. Any easing by the RBI will depend on what happens on the global front and to domestic inflation."

JONATHAN CAVENAGH, SENIOR FX STRATEGIST, WESTPAC, SINGAPORE

"The RBI obviously feels that inflation pressures remain too strong to ease policy further from here. It's a delicate balancing act though, as growth momentum is poor and policy remains too restrictive in our view, particularly given the weaker international backdrop.

"In any event near-term risks are INR to underperform the broader risk on move throughout the region. Risks are for USD/INR to pop back above 56.00 level in terms of the 1 month NDF. Should still be good selling resistance at 56.50 though."

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI

"The RBI has taken a very cautious stance and has given a signal that it would like to wait for some more data points on inflation and growth to decide which of the two constitutes to a more serious threat.

"A lot of contradictions in high frequency databases of India has made the RBI's job quite though."

KUMAR RACHAPUDI, FIXED INCOME STRATEGIST, BARCLAYS CAPITAL, SINGAPORE

"The RBI clearly surprised the market by not cutting either CRR or the repo rates. However, we do think that the RBI has changed tack on liquidity, i.e. it is now willing to provide more liquidity comfort to banks than before.

"For instance, the RBI did increase the limit of export credit refinance from 15 percent of outstanding export credit to 50 percent- this, according to the RBI is an additional injection of liquidity amounting to 300 billion rupees or approximately 50 bps of CRR cut. The RBI also maintained that management of liquidity remains priority and it will continue to use OMOs (open market operations) as and when warranted to contain pressures.

SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI

"The recent inflation readings have provided fair degree of discomfort and in terms of fiscal adjustment, steps are yet to be taken by the government. And, the RBI may want to keep its powder dry for future course of actions, in case there is resurgent stress in the eurozone. The front-loading of 50-basis-points cut in April was showing that growth momentum will be addressed.

"Future rate action would be contingent on concrete steps being taken by the government and the inflation trajectory. We are still looking at 25-50 basis points in the rest of the year."

SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI

"The Reserve Bank of India's action is clearly disappointing. Inflation remains a concern, but the slowing growth needed at least a 50-basis-point rate cut. The RBI will have to ease sooner or later, otherwise there will be further challenges to growth.

"It can cut the cash reserve ratio even before the next policy. The decision will depend on the liquidity tightness."

MARKETS

Bond prices and stocks dropped and the rupee weakened against the dollar after the decision surprised markets that had been expecting the central bank to loosen policy.

The benchmark 10-year bond yield rose 9 basis points to 8.43 percent from beforehand while the new 10-year bond yield rose about 7 basis points.

The Sensex erased gains to fall 0.6 percent from before the decision.

The rupee weakened to 55.53 per dollar from around 55.35 before the RBI move.

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