M A I N   N E W S

Cautious RBI keeps rates unchanged
Gives priority to containing inflation over growth
Sanjeev Sharma
Tribune News Service

New Delhi, June 18
Crushing the hopes of industry seeking a revival in the economy and consumers expecting some relief in their EMIs, the Reserve Bank of India (RBI) today refused to cut interest rates that shocked stock markets which had been widely anticipating such a move.

Given the sharp slowdown in growth of the economy, the RBI move to keep the benchmark repo rate unchanged and not even ease liquidity through a CRR cut surprised all sections as a cut had almost been factored in.

The RBI chose to give priority to containing inflation over reviving growth. RBI Governor D Subbarao said in his monetary policy review that further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures.

The RBI said that while growth has moderated significantly, headline inflation remains above levels consistent with sustainable growth. It also highlighted that the government has not taken enough measures for fiscal consolidation to enable a rate cut and that interest rates play a small role in investments.

The RBI move came as a shock to the stock markets which had built in a rate cut. Stock markets, which opened with gains in the morning on rate cut hopes and on positive developments in Greece, reacted negatively and fell by over 200 points after the policy announcement.

Finance Minister Pranab Mukherjee said high inflation may have weighed on the RBI’s mind while deciding not to cut rates. Commerce Minister Anand Sharma called the decision disappointing and said it would not help in reversing the trend when it comes to the core sector of the industrial manufacturing.

Markets and industry too were unenthused by the lack of RBI action. Tarun Kataria, CEO-India, Religare Capital Markets, said: “Given the poor growth outlook and tightness in the money markets, this move, or absence thereof, comes as a negative surprise to the markets. While we understand the need to eliminate supply side bottlenecks, RBI’s emphasis should be skewed towards growth”.