RBI stays cautious despite FM signals
The Reserve Bank’s quarter per cent cut in the cash reserve ratio (the portion of their cash that banks must keep with the RBI) has highlighted the difference in perception on the need for an interest rate cut to boost growth between the government and the corporate sector on the one hand and the RBI’s position.
The stock markets gave the token CRR cut a thumbs-down, with the Sensex sinking 205 points as they had hoped for a rate cut given that growth has been sluggish over several quarters.
The RBI itself has been downsizing the growth rate projections from 7.3 per cent in its April 2012 policy to 6.5 per cent in July, and to 5.8 per cent in Tuesday’s second-quarter review of monetary policy 2012-13. Yet, the RBI chose to leave the key policy rates untouched, and only reduced CRR in order to primarily pre-empt the tight liquidity expected with the onset of the festive season. RBI governor D. Subbarao told a post-credit policy press conference that the CRR cut would provide liquidity conditions for better transmission of policy rates to lending rates for productive sectors. The quarter per cent CRR cut will inject around Rs 17,500 crore into the banking system. But the truth is that the banks have been slow in passing on
successive CRR and repo rate cuts to
various sectors. Their main complaint is that there are no good project proposals before them.
Finance minister P. Chidambaram, however, appears to think otherwise. He was at his satirical best while reacting to Tuesday’s policy announcement, saying if the government had to walk alone to face the challenge of growth, then it would simply walk alone. He feels that the government had sent a clear message that it was on the path of fiscal consolidation, but that was obviously not how the RBI read it.
Dr Subbarao has said he appreciates the government’s policy announcements, but that the RBI would look for details on how the roadmap to fiscal consolidation will be implemented. He has held out the promise of a rate cut in the January-March quarter.
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