Reserve Bank of India leaves rates untouched

Defying the clarion call for a slash in interest rates, the Reserve Bank of India (RBI) stunned the industry by leaving them untouched but signalled that the immediate priority is to check inflation.

The repo rate at eight per cent, the reverse repo at seven per cent and the cash reserve ratio (CRR) at 4.75 per cent were left untouched sending the message that a rate cut now might "exacerbate" inflation, which is the highest among BRICS group.

Repo is the rate at which RBI lends to banks, reverse repo is the rate at which it borrows from banks and CRR is the percentage of total deposits that banks have to keep with RBI.

"We are all disappointed," Adi Godrej, chairman, Godrej Group, said adding, "I don't have anything more to say."

Pradeep Jain, chairman, Parsvnath Developers, said that he was "highly disappointed". "Now, RBI, along with the government, has to come out with policy measures to improve the sentiments as there are a lot of issues to be addressed. These include the falling rupee, lower GDP growth and the overall slump in economy," Jain said adding the liquidity issues would continue to plague the real estate sector. The real estate sector was hoping for a cut in rates as borrowing costs-which had gone up in the last 12 months-were impacting the sector.

The industry was hoping that RBI would cut interest rates in its credit policy review, its first for the financial year, by, at least, a quarter to half-a-percentage. Some of them were also expecting a slash in CRR rates by at least one per cent.

"By keeping rates unchanged, RBI is saying that inflation is a danger and it needs to be tackled urgently. We are no more in the comfort zone," said DK Joshi, chief economist, Crisil, adding, "I agree with RBI's concern on inflation and firm stance on the monetary policy. Economy can not be revived by rate cut alone."

The clouds of an economic downturn are gathering over the country, and according to the industry, a rate cut was the only hope. The index of industrial production numbers for the month of April was much below expectations at 0.1 per cent while the GDP growth rate slumped in the January-March quarter to a nine-year low of 5.3 per cent on fall in the manufacturing sector's output. "The markets were expecting at least a 25bps cut; so, a status quo policy comes as a bit of a disappointment. But the fact is that in spite of significant decline in growth, inflation has remained very sticky in India creating challenges in monetary policy-making," Dinesh Thakkar, chairman and managing director, Angel Broking, said.

Last week, global rating agency Standard & Poor's cautioned that the country might become the first BRICS nation to lose its investment-grade rating unless growth issues were addressed immediately.

Source:indiatoday.intoday.in