RBI keeps Status Quo but misses an Opportunity to push up Industrial Growth

The Reserve Bank of India should have reduced the interest rate by a modest 0.25%--0.5% with a view to provide a much-needed upward thrust to the economy, especially to some key sectors like manufacturing, according to Indian merchants Chamber.

In IMC’s view, if the RBI had signaled cut in rates, it would have had a multiplier effect on the growth inducing factors in the economy. Such a step at this juncture would also have helped to enhance the global competitiveness of Indian industries, especially in the light of steady appreciation of the rupee value, said Mr Niraj Bajaj, IMC President, in a press statement issued in the wake of the RBI’s credit policy announcement.

Mr. Bajaj felt the timing was just right for a downward revision of benchmark rates, given the consistent decline in headline inflation to below the RBI’s tolerance level of 5%. Though inflation at 3.5% is benign but inflationary expectations at this juncture are high arising from commodity price rise, volatile oil markets and impact of likely foreign exchange inflows into emerging market economies. These expectations would have been ideally tackled by promoting growth through a cut in interest rate now.

Some boldness on the part of RBI was required to boost the economic growth at this juncture, especially to counter the effects of a cool-off of the US economy on Indian industries, instead of choosing to be content with the current rate of 8.5% annual growth GDP, Mr Bajaj said.

Adopting a cautious wait-and-watch policy, the RBI chose to keep all its key policy rates, unchanged at the present level. It retained the Bank Rate unchanged at 6%, reverse repo at 6% and the repo rate under the LAF at 7.75 % and CRR at 7.5%.

Mr Bajaj noted with satisfaction the RBI’s readiness to conduct overnight or longer term repo/reverse repo under the LAF, depending on market conditions and other relevant factors.

Mr Bajaj also agreed with the RBI’s view that the Indian financial markets required careful monitoring of large flows of foreign exchange, especially the likelihood of reverse flows happening because of global sentiments.