The Reserve Bank of India might have decided to keep the key policy rates unchanged on the recent comments by the US Federal Reserve regarding their interest rates, Housing Development Finance Corp Vice Chairman and Managing Director Keki Mistry said on Wednesday.
“RBI might have kept US Fed’s comments on rate hikes in mind,” Mistry told ET Now in an interview, adding that one cannot have imbalance of the US Fed hiking rates on one hand, and the RBI cutting those on the other hand.
Earlier today, the Reserve Bank of India’s Monetary Policy Committee decided to keep the key policy rate unchanged at 6.25% against expectations, and toughened the policy stance to ‘neutral’ from ‘accommodative’, despite saying that it expects the consumer price inflation to remain below 5% in Jan-Mar, and continue to be muted in Apr-Jun on base effect and fall in demand.
The central bank opted to wait for more clarity on the trend of inflation and on the economic impact of demonetisation.
Earlier last week, a US Fed official said that action “is on the table” for March, sparking speculation that it may raise interest rates next month.
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Mistry said that while the macro data could have suggested the room for a 25 basis points cut in rates, the need to control inflation was the likely reason for change in stance to ‘neutral’.
Several analysts had expected the Reserve Bank of India to reduce key policy rates by 25 basis points to 6% in order to spur an economy recovering from the impact of demonetisation, as India’s falling inflation and a fiscally prudent budget had given it enough room to cut rates sooner to give a boost to the economy.
Benchmark stock indices ended flat to marginally down, recouping the losses from post-RBI-policy shock, while bonds fell sharply, with the benchmark 10-year bond yield rising as much as 25 basis points.
Mistry said that the investment cycle in the country is slow due to excess capacity in the system, and not because of high interest rates. There was a “need to go for higher capacity utilisation to kickstart investment”, he added.