RBI defies all, leaves rates unchanged

Sensex plunges 300 pts on RBI rate move

It also rejected the widespread demand for reduction in Cash Reserve Ratio (CRR) to pump in more money into the banking system.

High interest rates don?t stall projects: CMIE

Unveiling the mid-quarter monetary policy review, RBI said, “reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressure”.

While the short term lending rate (repo) has been kept unchanged at 8 per cent, the CRR, portion of deposits banks are required to park with the RBI, will be 4.75 per cent.

The wholesale inflation was 7.55 per cent in May. At the retail level, the Consumer Price Index (CPI) inflation for May was 10.36 per cent.

RBI’s action, according to Finance Minister Pranab Mukherjee, was influenced by the current price situation.

“(High inflation)…might have weighed their (RBI’s) decision making process…normally in mid-quarter review, it is not necessary for the Governor to consult the Minister,” he said in New Delhi after the policy announcement.

Mukherjee had said on Saturday that he was expecting the RBI to “adjust” the monetary policy to fuel growth.

Stock markets, which opened with gains in the morning on rate cut hopes and on positive developments in Greece, reacted negatively. The BSE Sensex fell sharply by over 200 points after the policy announcement.

Assocham President Rajkumar Dhoot said, “We are disappointed that RBI ignored all expectations, including observations of the Finance Minister about the need for a rate cut.”

Chairman of Prime Minister’s Economic Advisory Council (PMEAC) C Rangarajan said RBI has probably decided to wait for more time before taking policy action.

“Perhaps the RBI wants to wait for some more time…the end of the quarter may be the appropriate time to make some decision,” he said, adding that the central bank might take some steps at the next policy review.

“I would think that six weeks from now, when the next review takes place…that would be the critical point…when policy decision would be clear,” Rangarajan said.

The only important decision that RBI announced in its mid-quarter review was to provide some help to exporters. It raised the export refinance credit limit from 15 per cent to 50 per cent with a view to releasing additional liquidity of about Rs 30,000 crore, equivalent to about 0.5 per cent of reduction in the CRR.

The decision, RBI said, would augment liquidity and encourage banks to increase credit flow to the export sector.

Countering the argument that high interest rate has been the reason behind the record dip in growth, RBI said the real effective bank lending rates are still lower than the high growth period of 2003-2008.

“This suggests that factors other than interest rates are the contributing more significantly to the growth slowdown,” RBI added.

The cautious stance comes at a time when pressure has been mounting on the Mint Road mandarins to do something to revive the sagging growth and boost sentiment, which dipped to a nine-year low of 5.3 percent for three months ending March.

The GDP growth for the fiscal 2011-12 also plunged to 6.5 per cent, lower than the 6.7 per cent reported during the peak of post-Lehman collapse credit crisis.

Bankers, led by the country’s largest lender State Bank of India, were rooting for a cut in CRR saying it will help in quicker transmission while a slew of think-tanks and analysts were expecting a 0.25 per cent cut in repo rates, given the dismal growth data.

Commenting on the RBI status quo on rates, CII Director General Chandrajit Banerjee said, “Inflation is going up because of supply-side issues. We are extremely disappointed (over unchanged rates).”

Keeping in view the current industrial and economic scenario, he said, “the RBI should immediately cut interest rates by 1 per cent”.

Ficci Secretary General Rajiv Kumar said RBI could have helped in increasing investments by reducing rates.

In its guidance, RBI said future policy actions would be guided by the evolving growth-inflation dynamics, with an eye on the external and domestic development that contribute to lowering inflation risks. The next policy review will be announced on July 31.

RBI said management of liquidity is a key concern and it will continue buy government bonds.

On the rupee fall, it said this should make the country’s exports competitive overtime and act as a demand stimulus.

The political inability to pass on elevated crude prices to consumers is resulting in a widening of the current account deficit, and will end up crowding out investment at a time when encouraging investment is imperative from the growth perspective, RBI said.

On the troublesome economic situation globally, it said the evolution of the euro-zone crisis which has a bearing on the capital inflows, will be a factor to look out for.

Between March 2010 and October 2011, RBI had cut repo rates a record 13 times, by 350 basis points, in its battle against inflation.

After a gap of three years, on April 17, 2012, RBI had slashed short term lending rate by 0.50 per cent to 8 per cent. It had indicated then that its space to cut rates further was difficult.

RBI enhances export credit refinance limit; injects Rs 30K cr

The Reserve Bank today decided to enhance the Export Credit Refinance (ECR) limit to 50 per cent of the outstanding rupee export credit for banks, from 15 per cent, a move that will inject Rs 30,000 crore into the system.

“With a view to enhancing the credit flow to the export sector, it has been decided to enhance the eligible limit of the ECR facility for scheduled banks (excluding RRBs) from 15 per cent of the outstanding export credit eligible for refinance to 50 per cent, effective fortnight beginning June 30, 2012,” RBI said in its mid-quarterly policy review.

This will provide additional liquidity support to banks of over Rs 30,000 crore, the apex bank said.

The interest rate charged on the ECR facility is equivalent to the repo rate, which is currently 8 per cent.

The move of the RBI would provide some kind of leeway to the bank to borrow up Rs 30,000 crore.

“I do not think this will be such a big kicker on liquidity… Availability of funds is not the issue, it is the cost of funds which is the issue. So I do not it is such a big relief item,” IndusInd Bank MD and CEO Romesh Sobti said.

Stocks More on HDFC Bank

Company INFO More on ICICI Bank

COMMENTARY

LEIF ESKESEN, CHIEF ECONOMIST FOR INDIA AND ASEAN, HSBC, SINGAPORE

It was the right decision from the Reserve Bank of India’s perspective because a significant portion of the slowdown in growth is because of supply constraints, and a cut in monetary policy rates or even the cash reserve ratio is not going to make much impact on growth.

In addition to that, inflation remains high and there are risks when it comes to the inflation outlook. Any easing by the RBI will depend on what happens on the global front and to domestic inflation.

JONATHAN CAVENAGH, SENIOR FX STRATEGIST, WESTPAC, SINGAPORE

The RBI obviously feels that inflation pressures remain too strong to ease policy further from here. It’s a delicate balancing act though, as growth momentum is poor and policy remains too restrictive in our view, particularly given the weaker international backdrop.

In any event near-term risks are INR to underperform the broader risk on move throughout the region. Risks are for USD/INR to pop back above 56.00 level in terms of the 1 month NDF. Should still be good selling resistance at 56.50 though.

A. PRASANNA, ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP LTD, MUMBAI

This policy is consistent with the April statement. Unless the government takes steps on fiscal adjustment, the RBI is not prepared to cut rates. Based on this document, there’s unlikely to be a rate cut in July. The timing then shifts to September, but then we live in an uncertain world. Things can change, there will be domestic data and we need to look at global developments. If there is a demand shock globally, the RBI will be prepared to respond.

There’s hope that once the presidential election is over, and there is reshuffle at the finance ministry, the government may take some action on reforms, and on subsidies. But, the July policy of the RBI may come a little early before the government can take steps. But, we need to see if something positive happens from the government.

RAHUL BAJORIA, REGIONAL ECONOMIST, BARCLAYS, SINGAPORE

The growth weakness is such that it does call for monetary easing. We still expect RBI to ease rates by 100 basis points in the year. At this point it looks that in July, the RBI could cut the repo rate by 25 basis points or even higher. The core inflation is weak, but the headline inflation has to go up as a result of fiscal adjustment.

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI

The RBI has taken a very cautious stance and has given a signal that it would like to wait for some more data points on inflation and growth to decide which of the two constitutes to a more serious threat.

A lot of contradictions in high frequency databases of India have made the RBI’s job quite though.

KUMAR RACHAPUDI, FIXED INCOME STRATEGIST, BARCLAYS CAPITAL, SINGAPORE

The RBI clearly surprised the market by not cutting either CRR or the repo rates. However, we do think that the RBI has changed tack on liquidity, i.e. it is now willing to provide more liquidity comfort to banks than before.

For instance, the RBI did increase the limit of export credit refinance from 15 percent of outstanding export credit to 50 percent — this, according to the RBI is an additional injection of liquidity amounting to 300 billion rupees ($5.4 billion) or approximately 50 bps of CRR cut. The RBI also maintained that management of liquidity remains priority and it will continue to use OMOs (open market operations) as and when warranted to contain pressures.

We think that this upmove in OIS yields gives us a chance to receive rates.

SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI

The recent inflation readings have provided fair degree of discomfort and in terms of fiscal adjustment, steps are yet to be taken by the government. And, the RBI may want to keep its powder dry for future course of actions, in case there is resurgent stress in the euro zone. The front-loading of 50-basis-points cut in April was showing that growth momentum will be addressed.

Future rate action would be contingent on concrete steps being taken by the government and the inflation trajectory. We are still looking at 25-50 basis points in the rest of the year.

SURESH KUMAR RAMANATHAN, FIXED INCOME AND FX STRATEGIST, CIMB, KUALA LUMPUR

As we expected they kept rates unchanged, the key here is inflation and a cut would have exacerbated the outflow of funds. INR should remain stable to firm on the back of today’s decision. We see the risk of OIS rates moving higher as receivers are squeezed.

INDRANIL PAN, CHIEF ECONOMIST, KOTAK MAHINDRA BANK, MUMBAI

This is a fair judgment on the part of the RBI to say that interest rates alone will not affect the overall economy. It is very difficult to say how the economic issue will pan out. We still stick to our outlook of another 50 bps cut over the course of the year.

SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI

The Reserve Bank of India’s action is clearly disappointing. Inflation remains a concern, but the slowing growth needed at least a 50-basis-point rate cut. The RBI will have to ease sooner or later, otherwise there will be further challenges to growth.

It can cut the cash reserve ratio even before the next policy. The decision will depend on the liquidity tightness.

G. CHOKKALINGAM, Group CIO, Centrum Wealth Management

It is unfortunate that the RBI hasn?t taken any initiative to ease the monetary parameters. It has decided to keep both Repo rate and CRR unchanged.

Though it is a temporary setback to the equity market, we firmly believe that there are several positive developments which would more than mitigate the any risk arising from the monetary policy. Some of them are:

– some reform measures like FDI in retail;

– favorable development in Greece;

– passage of bills pertaining to Banking & Pension with help of political parties like SP and BSP during the monsoon session of Parliament

– monsoon improving its progress from yesterday

– new Finance Minister who can provide further boost to reform measures and also keep GAAR aside

Reversal of rate cycle would have given tremendous boost to the market today. However, the above mentioned factors can revive the market once again. Over 22% fall in oil prices can also improve the prospects going ahead. We continue to hold very optimistic outlook for the equity market at current attractive valuation ? we firmly believe that the market can go up (for the reasons mentioned above) by at least 20% from the current level by end of December 2012. Hence, we suggest focusing gain on value stocks

In our view the only risk to the market is any possible failure of monsoon

MARKETS

Bond prices and stocks dropped and the rupee weakened against the dollar after the decision surprised markets that had been expecting the central bank to loosen policy.

The benchmark 10-year bond yield rose 9 basis points to 8.43 percent from beforehand while the new 10-year bond yield rose about 7 basis points.

The main BSE index erased gains to fall 0.6 percent from before the decision.

The rupee weakened to 55.53 per dollar from around 55.35 before the RBI move.

BACKGROUND

– India’s economy has been slowing sharply due to a combination of factors such as high borrowing costs, government inaction on key policies and sluggish global environment.

– Standard & Poor’s said last week that India could become the first of the so-called BRIC economies to lose its investment-grade status, less than two months after cutting its rating outlook for the country.

– Industrial output rose just 0.1 percent in April, lower than expectations in a Reuters poll for a 1.7 percent increase. Output fell in March from a year earlier by 3.5 percent.

– Economic growth slowed to 5.3 percent in the March quarter, its weakest pace in nine years and sharply off 9.2 percent rise in the year-earlier period.

– Price pressures remain high with the wholesale price inflation accelerating to 7.55 percent in May from a year earlier, driven by double-digit rises in food and fuel prices.

– The Reserve Bank of India cut policy rates in April for the first time in three years, by 50 basis points, after raising them 13 times from March 2010 to last October.

Mutual Funds Check for top funds

Reuters: India stuns, keeps rates steady as growth crumbles

Expectations had been for 25 bps cut in repo rate; decision on rates puts burden on govt to spur growth.

India’s central bank left interest rates and required bank reserves unchanged on Monday, defying widespread expectations for a rate cut and warning that relaxing policy could worsen inflation. Bonds, stocks and the rupee all fell.

The Reserve Bank of India kept its policy repo rate unchanged at 8 percent and left the cash reserve ratio for banks at 4.75 percent, putting the onus on the government to take measures to revive flagging economic growth.

Further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures, the RBI wrote in its mid-quarter policy review.

India’s benchmark 10-year bond yield rose 9 basis points to 8.43 percent from levels before the announcement, while the new 10-year bond yield rose about 5 basis points.

The main BSE index erased gains before the decision to fall 1.1 percent, while the rupee weakened against the dollar to 55.60/62 from around 55.35-55.40 before the decision.

The Reserve Bank of India’s action is clearly disappointing, said Sujan Hajra, chief economist at Anand Rathi Securities in Mumbai.

Inflation remains a concern, but the slowing growth needed at least a 50-basis-point rate cut. The RBI will have to ease sooner or later, otherwise there will be further challenges to growth, he said.

After cutting its policy rate by 50 basis points in April, the RBI had been widely expected to leave rates unchanged in June.

But global and domestic economic conditions have deteriorated sharply since then, driving expectations that India would cut both interest rates and the cash reserve ratio.

India’s March quarter economic growth of 5.3 percent was far worse than expected and the weakest annual pace in nine years. The data sparked calls from industry for immediate action to lift an economy that Standard & Poor’s says could be the first BRIC nation to lose its investment-level credit rating.

Meanwhile, April industrial output figures last week suggested little pickup in economic growth heading into the current quarter.

The government is politically hamstrung, so is unable to drive reform and its deep fiscal deficit leaves it no room to provide stimulus spending at a time when the euro area debt crisis is weighing on the global economy, a factor set to dominate a G20 meeting in Mexico on Monday and Tuesday.

LITTLE HEADROOM

However, RBI Governor Duvvuri Subbarao had little room to maneuver after May benchmark inflation rose to 7.55 percent, below double-digits from last year but still highest among industrialised countries and the BRIC group of Brazil, Russia, India and China.

While growth in 2011-12 has moderated significantly, headline inflation remains above levels consistent with sustainable growth, the RBI said.

Both China and Brazil have cut rates this year in order to support growth.

Unless the government takes steps on fiscal adjustment, the RBI is not prepared to cut rates. Based on this document, there’s unlikely to be a rate cut in July, said A. Prasanna, economist at ICICI Securities Primary Dealership in Mumbai.

Investors and companies have long called for India to implement pro-growth policies that would spur investment and help remove bottlenecks in the economy blamed both for restricting growth and keeping inflation high.

HSBC economist Leif Eskesen said the RBI’s decision to hold fast was the right one.

A significant portion of the slowdown in growth is because of supply constraints, and a cut in monetary policy rates or even the cash reserve ratio is not going to make much impact on growth, he said.

On Friday, India’s ruling Congress party named Finance Minister Pranab Mukherjee as its nominee for the largely ceremonial post of president, ending a protracted political drama that had exposed the weakness of the coalition government.

With no obvious successor, Prime Minister Manmohan Singh, 78, could take charge of finance for now, a source close to the finance minister told Reuters. As finance minister during India’s balance of payments crisis in 1991, Singh was the architect of reforms that spurred accelerated growth.

There’s hope that once the presidential election is over, and there is reshuffle at the finance ministry, the government may take some action on reforms, and on subsidies. But, the July policy of the RBI may come a little early before the government can take steps, Prasanna said.

Pre-meet, all eyes on RBI Governor as rate cut expectations rise

Mumbai, June 17 (PTI) RBI Governor Duvvuri Subbarao is expected to go slow on his over two-year-old anti-inflationary posture and unveil a softer interest rate regime on Monday as more dark clouds gather over the economy, although inflation still remains above the Reserve Bank’s comfort zone.

Following the shocking latest GDP numbers, which showed that economic expansion had hit a nine-year low at 6.5 per cent in FY’12, there have been incessant calls from the government as well as economists to give growth concerns a priority, rather than the inflation.

Last Saturday, Finance Minister Pranab Mukherjee had expressed confidence that Reserve Bank will “adjust the monetary policy…I am confident the RBI will adjust the monetary policy, as we are adjusting fiscal policy (to prop up the economy),” Mukherjee said at an industry event here.

The RBI Governor will unveil the mid-quarter review of monetary policy on Monday, wherein, it is expected, he will bring down the key short-term lending rate or repo rate by at least 0.25 percentage point to 7.75 per cent, and may even lower the cash reserves ratio by up to 1 percentage point.

So far this year the Governor has reduced CRR by a hefty 125 bps and the repo rate by a more than expected 50 bps as the core inflation began to ease and growth began to dodder.

This was a radical departure from his 20-month rate-hike cycle beginning March 2010 wherein he had ratcheted up lending rates by a whopping 350 bps.

But headline inflation is not giving the Governor any comfort at present, as it rose to 7.55 per cent in May. Yet, the IIP numbers released last week strengthened the call for rate cuts as the April factory output data was barely in the green zone at a paltry 0.1 per cent.

The steep contraction in exports, which in May fell by over 3 per cent and the steep plunge of the rupee also make a case for easing of rates.

Chief Economic Adviser Kaushik Basu and Planning Commission head Montek Singh Ahluwalia have called for pro- growth and out-of-the-box measures from the RBI.