Clearly, the RBI gave more weight to “positive” domestic factors rather than the “complexities” evolving in the global markets.
Any stand depends on which side you are sitting
— Y V Reddy
MUMBAI: In its third quarter monetary policy review, the Reserve Bank of India (RBI) governor decided that his position and those of peers such as Ben Bernanke of the US Federal Reserve are totally different.
So on Tuesday he kept key interest rates at 6-year highs.
Clearly, the RBI gave more weight to “positive” domestic factors rather than the “complexities” evolving in the global markets.
The decision comes just a week after the US Fed cut its target funds rate by a whopping 75 basis points and probably just a day before another 50 basis point rate cut by the Fed.
While keeping rates unchanged the central bank emphasised on “price stability and anchoring inflation” while reminding that it will “respond swiftly with appropriate measures” whenever needed.
Reddy was under pressure to cut rates especially after the Fed cut last week but he was at pains to explain that domestic economic conditions are totally different from the US.
“The US is facing a slowdown whereas India is projected to grow at 8.5% in 2007-08 which if not the highest will be the second highest growth rate in the world. Also their financial markets are just recovering and they have a problem with liquidity which is not the case here,” Reddy said.
In its policy statement the RBI said that domestic outlook remains positive driven by investments. The central bank is confident of maintaining the 8.5% growth for 2009 as well.
However, it admitted that there is an indication of moderation in business confidence.
“Moderation in the growth of the industrial sector may need further exploring to assess whether some of the segments are reflecting correction of excesses in previous years or whether there are sector specific factors which require attention,” the central bank said in its policy statement.
Responding to whether the lower credit growth would warrant a rate cut by RBI, the central bank chose to pass the onus on banks themselves.
“Banks must undertake procedural changes for improving credit delivery, credit growth has moderated despite surplus liquidity. Credit has not expanded in proportion to excess liquidity,” the RBI said indicating that banks should do more to push credit growth instead of blaming higher rates for lack of credit growth.
The RBI pointed out that banks prefer to invest more in statutory liquidity ratio securities than lending and bank’s haven’t cut lending and deposit rates despite expansion in liquidity.
RBI officials pointed out that banks were still borrowing funds through deposits priced above the 7.75% repo rate and despite were comfortable in parking funds with the RBI at 6% reverse repo rate rather than lowering lending rates to pump up credit growth.
Making “liquidity management priority for policy” the central bank pledged “to take timely action to manage liquidity.”
Reddy said that the current stance of the policy gives the RBI enough room to go either way with interest rates.
“We will continue to watch the situation very carefully and would take time action,” Reddy said.
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