Inflationary pressures hold cut in key rates by RBI
It kept the CRR unchanged at four percent and the repo rate at 7.25 percent
Jun 27, 2013
Source : The Economic Times


BANGALORE: The Reserve Bank of India (RBI) kept all the policy rates unchanged in the Credit Policy review on June 17. However, going by the current macroeconomic factors, this was quite expected. The RBI decided to hold the repo rate and cash reserve ratio (CRR) at the existing levels. It kept the CRR unchanged at four percent and the repo rate at 7.25 percent.

The RBI stated there are upward pressures on inflation pushed by the weakness in the currency, increase in administered prices, elevated food inflation, and uncertainty over inflows in foreign funds. Further, the trade gap has surged due to increased gold imports. In the last policy announcement on May 3, the RBI had cut the repo rate by 0.25 percent.

The RBI is concerned about the fall in the rupee, external risks and elevated food inflation. In addition, there is a continuing weakness in the manufacturing sector. According to the RBI, balance of payments, inflation and the growth rate will determine future monetary policy stance, including the timing of rate cuts. Durable receding in inflation needs to be visible for further monetary easing.

Many were expecting a cut in the policy interest rates in the light of the drop in the annual Wholesale Price Index (WPI) based inflation rate from 4.89 percent to 4.70 percent, and in the Consumer Price Index (CPI) based rate from 9.39 percent to 9.31 percent between April and May. In both cases, food inflation is high and rising. The CPI based rate is in double-digits. Though the headline inflation rate has come down, the RBI has been concerned over the persistently high food inflation rate, which has been hovering close to 10 percent. Further, the rupee has declined by 5.80 percent since January 1 and touched a record low of Rs 58.96 to a dollar.

The RBI has said, ‘it is only a durable receding of inflation that will open up the space for the monetary policy to continue to address risks to growth’. Further, the RBI has noted that ‘inflation has moderated as projected. However, upside pressures on the way forward from the pass-through of rupee depreciation, recent increases in administered prices and persisting imbalances, especially relating to food, pose risks of second-round effects. Future monetary policy stance will be determined by how growth and inflation trajectories and the balance of payments situation will evolve in the months ahead’.

However, the RBI has indicated that in case the inflationary factors are under control, the July policy may witness a rate cut. Actually, the RBI has had the unenviable task of maintaining a balance between growth and inflation. The measures taken in the last few years have subdued the inflation rate. However, inflationary forces are still sitting on the fence. As such, the RBI has been constrained from reducing the key rates any further, lest it fuels the inflationary forces again.

In the current circumstances, it makes sense to go in for a floating rate loan rather than a fixed rate one, as the interest rates are eventually expected to drop in the coming months.

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