The Reserve Bank of India left key rates unchanged in its monetary policy review announced on Tuesday, indicating that interest rates are unlikely to soften in the short term.

Ever since the US Fed cut rates by 75 basis points, there was a build-up of speculation on what the RBI would do. And the RBI chose to maintain status quo.

Responding to queries on why the RBI was not taking a cue from the US Fed, the Governor, Dr Y.V. Reddy, said that while it was a relevant input, domestic considerations dominated RBI’s policy.

“It is better to continue with the stance most relevant for the domestic economy and be watchful on global developments and take action,” Dr Reddy said.

It is an extremely difficult choice — between growth and inflation, between long-term and short-term, said the Governor. The RBI retained cash reserve ratio at 7.5 percent, repo rate at 7.75 percent and the reverse repo at 6 percent.

“The developments in the domestic economy are broadly in line with the policy expectations and in the normal course would not warrant any significant monetary policy initiatives at this juncture,” said RBI’s third quarter review.

The monetary policy would continue to focus on liquidity management and inflation control. Inflation has been within limits (below five percent), but faces upward pressures due to high oil and food prices, the review said.

The RBI has retained its GDP growth projection at 8.5 percent.

Responding to the RBI’s stance, bankers said they do not expect any change in the interest rate scenario before the next fiscal.

The RBI has also asked banks to be more proactive in extending credit to employment-intensive sectors.

The central bank has observed that instead of enhancing credit, banks have made excessive investments in SLR securities including MSS issuances, money market mutual funds and the LAF reverse repo, despite earning apparently lower interest rates thereon.

It has been indicated that a slight moderation in deposit and lending rates would be welcome, as deposit growth has exceed targets and credit growth has been restrained, despite surplus liquidity.

Ms Chanda Kochhar, Joint Managing Director, ICICI Bank, said: “The indication is that banks don’t need to wait for RBI’s signal but must take action on their own. While usually in January-March most banks raise interest rates, this year, they will stay stable, because of sufficient liquidity. We have to watch the impact on the cost of funds before taking a decision.”

Interest rates may see a softening in the next fiscal, she said.

Reduction of interest rates would depend on the cost of funds, said Mr T.S. Narayanasami, Chairman and Managing Director, Bank of India, said.

Mr. Neeraj Sharma

Neeraj Electronics

CEO, Neeraj Electronics
Jorhat, India

Free Member, Joined :06/09/2007
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