Status quo on, RBI points to a Jan rate cut

Acknowledging the recent moderation in inflation, a cautious Reserve Bank of India (RBI) on Tuesday maintained status quo on key policy rates, but clearly indicated it will cut rates in January. "Monetary policy has to increasingly shift focus and respond to the threats to growth", the RBI said, in its mid-quarter review of the monetary policy.

A day after the finance ministry urged the central bank to consider a "more accommodative monetary policy", the RBI refused to play the ball and retained the cash reserve ratio (CRR) — portion of deposits to be kept with the RBI — unchanged at 4.25 per cent and the policy repo rate — the rate at which the banks borrow from the RBI —under the liquidity adjustment facility at 8.0 per cent in its mid-quarter review of the monetary policy.

The RBI said headline inflation has been below the RBI's projected levels over the past two months. "The decline in core inflation has also been comforting. These emerging patterns reinforce the likelihood of steady moderation in inflation going into 2013-14, though inflation may edge higher over the next two months," it said.

GDP growth is evolving along the baseline projection of 5.8 per cent for 2012-13 set out in the October review, it said. However, it indicated that the monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards in the wake of ebbing inflation pressures. Liquidity conditions will be managed with a view to supporting growth, thereby preparing the ground for further shifting the policy stance to support growth, the RBI said.

Responding to the RBI policy, chief economic adviser to the finance ministry Raghuram Rajan said, "I think it's good that the RBI sees that there is room to ease... I look forward to good news in policy (January). But they (RBI) also have some incentive to seek growth in the country."


GROWTH: There are some indications of a modest firming up of activity in Q3. Capital goods production recorded a growth of 7.5 per cent after 13 successive months of decline.

LIQUIDITY: Money supply (M3) growth remained below its indicative trajectory because of lower deposit growth.

Liquidity conditions have remained tight in Q3 due to large government balances with the RBI and the widening wedge between deposit and credit growth.

INFLATION: Though consumer price inflation remains stubborn, the pace of moderation in wholesale price inflation has been faster than anticipated. With food and manufacturing prices expected to edge down further, inflationary pressures may ease in the coming months.

EXTERNAL SECTOR: With the step-up in oil imports persisting despite the moderation in crude prices, the cumulative trade deficit for April-November widened from its level a year ago indicating significant risks to the balance of payments.


indicators point to a modest firming up in the momentum of global growth over the rest of 2012 and in 2013 if there is firm policy action in the euro area and the US. The biggest risk stems from political economy considerations.

All eyes now on January review

We have been seeing some divergences between CPI (Consumer Price Index) and WPI (Wholesale Price Index). However, essentially inflation trend is moving downwards...

Subir Gokarn, Deputy Governor, RBI

Over a longer period of time, steps are needed to bring down the interest rate. RBI looks at these things ... and we should give them freedom to decide

Montek Singh Ahluwalia, Dy Chairman, Plan panel

There is no change in the Reserve Bank of India's stance so I would think there would be no change in our deposit or lending rates. Things are just as they were before

Pratip Chaudhuri, Chairman, State Bank of India

The movement in lending rates happens with the movement in the cost of funds. It is too early to say what action will happen in January.

Chanda Kochhar, MD & CEO, ICICI Bank

With the inflation numbers showing a decline and the global economy still in a difficult situation, industry is crying out for an impetus for investment and growth

Naina Lal Kidwai, President, Ficci

Our hopes of seeking some relief are dashed as the apex bank has yet again given away the opportunity to help reverse the business sentiments

Rajkumar Dhoot, President, Assocham

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