INDIA’S central bank kept its benchmark interest rate on hold on Monday (September 17), preferring to wait to see the impact of a flurry of government reforms before reducing the cost of borrowing.
The Reserve Bank of India had been under pressure from business leaders and the government to cut rates to give a further boost to the ailing economy, which grew at 5.5 per cent year on year in the April-June quarter.
Bank governor Duvvuri Subbarao acknowledged that recent reforms “have started to reverse sentiments”, but he said that inflation was still too high.
“For the moment, inflationary pressures, both at wholesale and retail levels, are still strong,” he said in a statement.
However, in a move to increase liquidity and lending in the banking sector, the bank cut its cash reserve ratio, the amount banks have to keep aside as deposits, by 25 basis points to 4.50 per cent.
Finance Minister P Chidambaram said the RBI was “supportive of what the government is doing.”
“Infusion of liquidity is a small but a welcome step,” he told the NDTV television channel, saying that additional government measures were expected before the next RBI meeting on October 30.
The Mumbai-based central bank has not cut benchmark rates since April in a bid to keep a lid on inflation, which hit 7.55 per cent in August – far above the RBI’s comfort level.
These inflationary pressures made it difficult for the bank to enact “big bang measures”, according to Siddhartha Sanyal, chief India economist with Barclays capital.
“He is still not comfortable with inflation but wants to send the message that he recognises growth concerns,” he told reporters.
C. Rangarajan, head of Prime Minister Dr Manmohan Singh’s economic advisory council, said the RBI had taken a “cautious stand”.
“If inflation touches (the) eight per cent level, then (the) RBI will have very little manoeuvrability to change rates,” he told NDTV.
Subbarao has repeatedly called for policy action from the government to reduce subsidies and improve the investment climate before further cuts can be approved.
Dr Singh’s cabinet approved a slew of measures late last week, hiking diesel prices, opening the doors to foreign investors in key sectors and approving the part-privatisation of four state-run companies.
Business leaders have been clamouring for a rate cut to help revive Asia’s third-largest economy, with growth in the three months to June the slowest in three years.
“They have kept the door open for a rate cut in future and shown their intention to promote growth,” said Abheek Barua, chief economist with private HDFC Bank, who had predicted a rate cut.
Investors’ disappointment in the policy was evident on the benchmark 30-share Sensex index, which was trading 0.18 per cent higher at 18,498.35 in the early afternoon, well off the day’s high of 18,715.02.
Premier Dr Singh faces serious opposition over his reforms from trade unions, protests and his fiery coalition ally Mamata Banerjee, who runs the regional Trinamool Congress party and wants the measures scrapped.
On numerous occasions in Dr Singh’s second term, the government has reversed or watered down reform proposals once confronted with resistance.
Moody’s ratings agency said on Monday that India’s reform plans would bolster investor sentiment, but would not significantly improve the state of the government’s strained finances.
Fellow ratings agency Standard & Poor’s also highlighted uncertainty over the implementation of the measures but said that they could have a “medium-to long-term positive impact on the macroeconomy of India”.
