RBI spares borrowers, keeps interest rates unchanged

Published: 19 Dec, 2013


Surprising bankers and markets, the Reserve Bank of India (RBI) on Wednesday spared borrowers with a status quo on interest rates, but promised to act if the expected softening of food prices doesn't materialise and translate into a significant reduction in headline inflation.

Contrary to expectations of a 25 basis point hike in repo rate to 8 per cent, RBI Governor Raghuram Rajan kept the repo rate steady at 7.75 per cent. "If inflation, excluding food and fuel, does not fall, the RBI will act, including on off-policy dates if warranted, so that inflation expectations stabilise and an environment conducive to sustainable growth takes hold," Rajan said while unveiling the mid-quarter review of the monetary policy.

Buoyed by the RBI move to hold rates, the BSE Sensex snapped the 6-session losing streak and rose by 247.72 points to close at 20,859.86.

The RBI Governor said the policy decision to hold rates was a close one. Listing reasons for not hiking rates, Rajan said, "There are indications that vegetable prices may be turning down sharply, although trading mark-ups could impede the full pass-through into retail inflation. The disinflationary impact of recent exchange rate stability should play out into prices."

Bankers said the "stay on rate hikes" will be shot in the arm for borrowers.

However, SBI Chairman Arundhati Bhattacharya said the bank would not contemplate cutting deposit rates. Chanda Kochhar, MD and CEO of ICICI bank said, "The RBI's commitment to managing adequate systemic liquidity and its balanced approach to growth and inflation should be seen as positives for economic recovery and stability."

The RBI kept the cash reserve ratio unchanged at 4.0 per cent of deposits, the reverse repo rate under the liquidity adjustment facility at 6.75 per cent, and the marginal standing facility rate and the Bank Rate at 8.75 per cent. Rajan had increased the rate by 50 basis points since taking charge of the RBI on September 4. Welcoming the decision, CII said, "... the RBI has demonstrated restraint and foresight to strike the balance between inflation and growth."

RBI Governor Raghuram Rajan on Wednesday maintained that the central bank is waiting for more data before taking further action on the policy front. "I want to emphasise we are not being soft on inflation … it shouldn't be taken that we're on hold. We are waiting for data. Hence as the data come in, we will react appropriately," Rajan said. Excerpts from a post-policy media conference:

ON CAD AND GOLD IMPORTS: I would be much happier if we had the kind of CAD we have without significant curbs on anything, including gold. We should aim to have a CAD without any distortions, removing the incentives for smuggling. That is what we will be working for.

NPAs NOT ALARMING: The level of NPAs (non-performing assets) and restructured loans is not alarming at this point in time, but it is something the RBI wants to take action on quickly before it gets to the point that it is alarming. In the long-run, some of the bad assets can produce revenues once they get the clearances. We need to put them back on track ...

ON GROWTH: Growth in the second half will be stronger than growth in the first half. Of course, the factors that will play out are agriculture, exports and stalled projects coming back on line. We hope they will come back on line. Tightening government spending in Q4 to meet Budget projections will add to these headwinds. In this context, the revival of stalled investment, especially in the projects cleared by the Cabinet Committee on Investment, will be critical.

NOT BUYING FOREX: We are not going into the market and buying reserves at this point to increase the foreign exchange reserves. We have not done that and the increase in reserves, thus far, has come from those windows (two concessional forex swap facilities opened by the RBI during the rupee crisis).

Source: Indian Express