RBI keeps all policy rates intact

RBI has not changed any of the key policy rates. All the rates including the Reverse Repo remain the same. The cash reserve ratio (CRR) has also been left untouched by the RBI.

RBI Policy Snapshots:

RBI keeps bank rate, repo rate, reverse repo rate unchanged
RBI keeps key policy rates unchanged
RBI keeps repo rate unchanged at 7.75%
RBI keeps reverse repo rate unchanged at 6%
RBI keeps CRR unchanged at 7.50%

There is no change in any of the rates. The much awaited repo rate has not been cut, it remains at 7.75%. The argument is what all of us expected: Elevated asset prices, expansionary monetary and liquidity conditions - basically pointing to the fact that money supply is at 23% against a target of 17-17.5%.

The big culprit, of course, being the accretion of Forex reserves and consequently higher than projected deposit growth. So, basically too much money in the system can always ignite inflation, and therefore a caution on that area.

Also the RBI Governor refers to elevated asset prices in a couple of places, and the potential rise in food and fuel prices globally. This combination is what seems to have won the day today, and kept the RBI from cutting any of the operational rates. The RBI goes on to point out that there is some moderation in industrial activity. But it says that in the months to come, you are going to see a modest figure because the base is high. It points to arguments that export slowdown and high fuel prices can all impact, but doesn’t seem to be entirely convinced of that argument. In fact, Dr Reddy, the Governor, meanders into smaller areas like they have to look at exploring the slowdown very carefully. It is probably because of sector specific reasons. It wonders why there is a slowdown in private consumption expenditure. I am myself wondering why the RBI should be wondering.

You have to call the stance as neutral. The document itself of the last policy was a bit hawkish. This time the document is not sounding so hawkish, except for pointing out to these inflation threats. The tone is overall definitely not as harsh as it was last quarter. But the policy stance itself is completely confusing. Most of the words are towards what we saw in the previous policy stance - the number of paragraphs has been crunched from four to three. But it doesn’t really give you an idea whether the RBI’s stance has changed. It seems to be in complete neutrality in terms of the policy stance. The moderation in industry that the RBI has noted in several parts is perhaps one idea of dovishness. But otherwise, there is no explicit dovishness. Using the word ‘dovishness’ is a bit difficult. I would just say that it is more neutral than what it was in the previous quarter. You cannot call it a hawkish document for sure.



One of the peculiar paragraphs in this monetary policy stance seemed to be almost an admonishing by the RBI Governor to the banks, pointing out if there is an expansionary liquidity conditions.

As the Governor points out - why haven’t deposit and lending rates fallen? He is asking, at some point time deposit rates are even higher than the repo rates and he is wondering why they have not fallen. He also goes on to say that if there is so much surplus liquidity; which there is - after all deposits have expanded above the projected trajectory - both aggregate deposits and M3 being high, why have banks not increased the credit offtake?

This is a little peculiar since on the previous occasion, he had said that he is uncomfortable with that kind of credit growth. This sentence is - despite comfortable liquidity conditions; banks have not expanded credit proportionately. Instead, banks have proposed to make excess investments in SLRs including MSS issuance. The other sentence is, effective interest rates on time deposits at the margin are currently ruling above the last repo rates. Apparently there has been little or no adverse impact on bank margins.



He goes on to wonder - expansionary liquidity conditions engineered by capital flows have not prompted banks to reduce deposit and lending rates, which have been maintained at elevated levels. So, this is a veiled attempt at asking banks to lower deposit and lending rates and perhaps left to themselves - bankers will be doing it when their high cost deposits decline. But this is peculiar; he has not cut rates but is wondering why banks have not cut rates.



RBI says:
Headline inflation picked up since December 2007
Liquidity management to be priority for policy
Inflation to go up even if fuel prices remain unchanged
Upside risks to inflation to increase going ahead
Flexibility to change reverse repo, repo rates
CRR unchanged on preview of current liquidity situation
Financial markets warrant careful monitoring on large fx flows
Emphasis on price stability, anchoring inflation
Retain inflation aim of 4-4.5% for FY08, 3% in medium-term
To maintain GDP growth target of 8.5% for FY08
Can't exclude likely Forex flows reversal on global sentiment