No Cut on Repo Rate: RBI

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Commenting on the third bi-monthly monetary policy, Mr Chandrajit Banerjee, Director General, CII said that the RBI’s decision to maintain the status quo on policy rates indicates a guarded approach towards monetary easing to restrain inflationary expectations and is in alignment with market expectations.

CII is of the view that the policy of frontloading the interest rate cuts should have been allowed to continue as this would have sent a strong signal that the RBI aggressively addressing the growth risks in the economy accruing from weak demand conditions which are holding back investments.

In the policy, the RBI did not cut the repo rate because the rate of inflation has been on its way up. As the monetary policy statement pointed out: “Headline consumer price index (CPI) inflation rose for the second successive month in June 2015 to a nine-month high on the back of a broad based increase in upside pressures, belying consensus expectations…Food inflation rose 60 basis points [one basis point is one hundredth of a percentage] over the preceding month, driven by a spike in prices of vegetables, protein items – especially pulses, meat and milk – and spices.”

Food prices are something that the RBI cannot do much about. But prices on the whole have been going up as well. As the monetary policy statement pointed out: “Excluding food and fuel, inflation rose in respect of all subgroups other than housing. The momentum of price increases remained high for education. Inflation pressures increased for personal care and effects and household goods and services sub-groups. Inflation in CPI excluding food, fuel, petrol and diesel has been rising steadily since April.”

No doubt, CII appreciates the RBI’s concerns about the anticipated pipeline risks arising from inflationary expectations and unfavourable external developments as cited in the policy statement. However, crude oil prices have been on a downtrend thereby allaying fears of imported inflation, the timing of the proposed Federal reserve actions,  which is anticipated to unsettle our financial market, is still unclear and the government’s food policy management has beneficially impacted inflationary expectations which is reflected in our subdued headline inflation print.

At the same time, credit demand is weak and corporates and banks are grappling with a large number of stressed assets, particularly in the infrastructure sector. A cut in interest rate in such a situation would have done much to restore the investment cycle.

Going forward, CII expects that the spotlight would be shifted towards growth and RBI would resume monetary easing in its next monetary policy when there would hopefully be much more clarity about the inflation trajectory, the normalcy of monsoons and the possible Federal Reserve actions.

SMEStreet Desk

SMEStreet is fast growing platform dedicated to entrepreneurs from small and medium sized businesses (SMEs). Committed to facilitate Knowledge & Networking for Business Growth, SMEStreet offers value added content which shows the actual voice of Indian MSMEs.

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