Monetary Policy 2012-13

RBI keeps rates unchanged

Dinesh Unnikrishnan, Joel Rebello & Anup Roy

Mumbai: India’s central bank on Monday surprised the financial markets by keeping its key lending rate and cash reserve ratio (CRR) unchanged, making it clear that interest rates were not a major reason for falling growth in Asia’s third largest economy. A rate cut now could fuel inflation rather than help growth, it said.

The decision came on a day when new data showed that retail inflation continued to be in double digits in May and global credit rating agency Fitch downgraded its outlook on the Indian economy, citing growing risks to the India growth story in the absence of structural reforms.

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RBI’s decision to keep rates unchanged is a sensible one

Expert View | A. Prasanna

The Indian central bank is fast acquiring a reputation for being unpredictable. After pleasantly surprising markets with a larger-than-expected 50 basis points (bps) rate cut in April, the Reserve Bank of India (RBI) has shocked markets by not cutting rates in the June mid-quarter review.

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A difficult policy choice

Expert View | Samiran Chakraborty

The decision of the Reserve Bank of India (RBI) to keep policy rates unchanged came as a surprise to the markets but more than that, the forward-looking guidance indicated that the central bank is quite keen to continue its anti-inflationary stance despite the recent growth slowdown.

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RBI to govt: It’s your turn now

Mark to Market | Manas Chakravarty

Now that the Reserve Bank of India (RBI) has surprised the markets yet again, this time by not reducing rates, what should we expect its policy to be in the future? Its guidance is couched in central bank-speak about “the evolving growth-inflation dynamic” and “a continuing assessment of external and domestic developments that contribute to lowering inflation risks”. But the crux of the argument is that the government has done nothing.

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Bank stocks fall, could slip further

Mark to Market | Ravi Krishnan

There are a couple of reasons for the sharp fall in bank stocks on Monday. The first, of course, is that hopes of a rate cut were dashed. These hopes had been built into prices over the past fortnight after a string of depressed economic data and an off-hand comment from a central bank deputy governor.

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Ourview | No headroom for a rate cut

In its mid-quarter monetary policy review on Monday, the Reserve Bank of India (RBI) kept monetary conditions unchanged. After its surprising 50 basis points (bps) cut in the repo rate in April, a build-up of expectations for a further cut had occurred in the past two months. Instead, the central bank chose a course of prudence in the face of renewed inflationary pressures; and rightly so.

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Laudable and lone exception

Bare Talk | V Anantha Nageswaran

The Economist wrote a leading article recently (http://www. economist.com/node/21556576) that the incredible story of India has ended for now. In it, the editors of this “newspaper” had said that India was unlikely to keel over because of a cloistered financial system, ample foreign exchange reserves and a capable central bank. The central bank proved itself to be capable on Monday when, contrary to all the din and noise for a rate cut, for a reduction in the cash reserve ratio, the Reserve Bank of India (RBI) held its nerve and left the cash reserve ratio and the repo and reverse repo rates unchanged. It has vindicated the lead article in The Economist.

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Views | Six reasons why Subbarao kept rates unchanged

Niranjan Rajadhyaksha

The Reserve Bank of India has done well to hold interest rates despite growing pressure from the financial markets. The monetary policy statement by governor D. Subbarao provides a clear set of reasons why the Indian central bank has not reduces rates despite declining economic growth.

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RBI opts for status quo as inflation fears outweigh growth concerns

Dinesh Unnikrishnan

Mumbai: The Reserve Bank of India (RBI) on Monday retained its key rates, as inflation concerns outweighed expectations of a reduction to shore up slowing growth in Asia’s third-largest economy.

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Monetary policy: doing nothing is a greater risk

Mark to Market | Manas Chakravarty

After the May Wholesale Price Index (WPI) numbers, should the Reserve Bank of India (RBI) cut rates and/or reduce the cash reserve ratio (CRR)? That may be the wrong question to ask. If the economy is going down the drain, then core inflation is going to come down. If demand is badly hit, firms will be unable to pass on increases in costs and core inflation will decelerate.

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The backdrop | (PDF)

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Fresh setbacks set the stage for RBI action

Asit Ranjan Mishra & Kirthi V. Rao

New Delhi: There was more bad news about India’s economic situation on Thursday, with data showing that inflation accelerated, and both exports and imports contracted—the latter is a sign of falling demand.

Coming days after factory output signalled a flatlining economy, the inflation data has intensified the dilemma faced by the Reserve Bank of India (RBI), whose mid-quarter review of the credit policy is scheduled for 18 June: should it keep interest rates at the current level to rein in inflation, or should it ignore inflation and cut rates to spur economic expansion?

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Rate cut expectations reined in by inflation

Joel Rebello & Anup Roy

Mumbai: Persistently high inflation and fears that it could rise even higher have forced economists and bankers to temper their expectations from the Reserve Bank of India’s (RBI’s) mid-quarter monetary policy announcement on 18 June. They say that any cut in the key interest rate will be restricted to 0.25 percentage point, or 25 basis points (bps).

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Bonds shoot for rate cuts

Mark to Market | Ravi Krishnan

Like the mythical turtle, which, when it bites, will not let go until there is thunder, the bond market has got rate-cut expectations firmly between its teeth. Thursday’s release of wholesale inflation numbers for May at 7.55% wasn’t enough for the market to change its view; after all, this sort of number was expected.

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Ourview | Inflation woes not over yet

There is some good news in the latest inflation data released by the government on Thursday, which could add pressure on the Reserve Bank of India to reduce interest rates in its monetary policy due to be announced next week. Core inflation continues to fall. In other words, high inflation is being driven by prices of food and fuel rather than manufactured goods.

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Reading RBI’s tea leaves

Capital Account | Manas Chakravarty

Interest-rate sensitive stocks have been rallying hard on expectations of a rate cut by the Reserve Bank of India (RBI) at its policy meeting next Monday. Opinion about the rate cuts has ranged from warning the central bank about the danger of stoking inflation by cutting rates to a demand for a 50 basis points cut, in addition to reducing the cash reserve ratio (CRR) to improve liquidity. The arguments and counter-arguments are well-known. Those in the rate cut camp point to the low gross domestic product (GDP) growth number for the fourth quarter, to the fact that the Index of Industrial Production was flat in April, to the dire external environment, to lower crude oil prices and lower core inflation and to the plunge in adding new capacities.

The no-rate-cut camp talks of high headline inflation, of inflation trending higher when domestic fuel prices are increased, of rate cuts not being enough to kickstart investment, of the continued strength of consumption in the economy and of the need for RBI to hold its fire to force the government to act on the real supply-side issues.

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Ourviews | Why RBI should not lower interest rates

Renu Kohli

Band-aid solutions are no substitute for economic surgery. But this truth has no appeal in India where ready applications are the mode. As GDP growth slowed to 5.3%, markets, firms and the government are asking for such a dose from the doctor at Mint Street. Lower interest rates are perceived to be the cure as growth concerns occupying full stage and inflation is a forgotten variable. This deflects attention from long-overdue and unforthcoming fiscal adjustments; will temporarily boost market sentiment and improve corporate profits. But an interest rate cut will not help revive growth.

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All eyes and hopes rest on RBI

Capital Calculus | Anil Padmanabhan

For all practical purposes, nearly everyone has given up on an immediate policy revival; the cynical lot believe it will last till the end of the tenure of the Congress-led United Progressive Alliance (UPA), while the more optimistic argue that the situation will alter once the ongoing game of Kaun Banega Rashtrapati (Who will become the 13th President?) is over.

As a result, the focus has inevitably shifted to the Reserve Bank of India (RBI) and to what it can do to contain the macroeconomic slide.

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