Belying hopes of monetary easing to stimulate a sagging economy, RBI
has kept policy rates unchanged in its mid-quarter review of monetary
policy released recently. Thus, CRR remained at 4.75 per cent of
NDTL, repo, reverse repo and MSF rates under LAF at 8 per cent, 7 per cent
and 9 per cent, respectively. RBI had reduced repo/reverse repo/MSF
rates by 50 basis points in April last.
Reserve Bank has, however, increased the limit of export credit refinance
from 15 per cent of outstanding export credit of banks to 50 per cent,
which, it says, will potentially release additionally liquidity of over
300 billion,
equivalent to about 50 basis points reduction in the CRR.
Core inflation has moderated,
reflecting demand conditions
and lower pricing
power. But, even as growth in
2011-12 has moderated significantly,
headline inflation
remains above levels consistent
with sustainable growth.
Retail inflation is also on the
rise. Further, there are several
factors responsible for the
slowdown in activity, particularly
in investment, with the
role of interest rates being
relatively small. Consequently,
the apex bank believes
that reduction in the policy interest rate at this juncture could exacerbate
inflationary pressures, rather than supporting growth.
Though international crude prices have fallen significantly from their levels
in April 2012, the rupee depreciation has significantly offset its impact
on wholesale prices. Additionally, the subsidy burden on the government
following compensating oil companies for under-recoveries in administered
petroleum product prices raises concerns on setback in fiscal consolidation,
which is crowding out public investment at a time when reviving
investment, both public and private, is a critical imperative. The widening
current account deficit (CAD), despite the slowdown in growth, is symptomatic
of demand-supply imbalances and a pointer to the urgent need to
resolve the supply bottlenecks.
By way of guidance note, the apex bank says that while management of
liquidity remains a priority; evolving growth-inflation dynamic, particularly
food prices and southwest monsoon, will influence its stance on interest
rates.