Fine Balancing  Act of RBI

From last one week all economic analysts have been given their opinion about RBI interest rate. Economists polled by Reuters had forecast a rate cut, most likely of 25 basis points, while some government officials had also been calling for a rate cut. In my personal view, RBI has done fine balancing act and my sincere thanks to RBI governer for the appropriate decision at this crucial time. There was no need to rate cut at this moment when inflation no. is not comfortable.


After unchanged interest rate many analysts and economist will be certainly disappointed about growth. 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. 


The RBI kept its policy repo rate unchanged at 8 percent and left the cash reserve ratio for banks at 4.75 percent.The RBI obviously feels that inflation pressures remain too strong to ease policy further from here. The RBI has taken a very cautious step and has given a signal that it would like to wait for comfortable inflation figure.  Although it is very tough to contain both factor inflation and growth simultaneously. In my point of view, inflation is serious threat to us. First, inflation should be controlled because in last couple of  years inflation has been uncontrollable. Every person has been affected from this serious problem. 


Earlier in the day, CLSA economist Rajeev Mallik summed up the situation pretty well when he compared India's economy to a truck which was having problems. "The problem is in the gear box (government policies), adding more fuel in the tank (through interest rate cuts) is not going to solve the problem," Mallik told CNBC-TV18.


There are many reasons, cited by the RBI for not reducing interest rates:


* Estimates suggest that real effective bank lending interest rates, though positive, remain comparatively lower than the levels seen during the high growth phase of 2003-08. This suggests that factors other than interest rates are contributing more significantly to the growth slowdown.


* There are several factors responsible for the slowdown in activity, particularly in investment, with the role of interest rates being relatively small. Consequently, further reduction in the policy interest rate at this juncture, rather than supporting growth, could increase inflationary pressures.


* Should there be an event shock (in the Eurozone), central banks in advanced economies will likely do another round of quantitative easing. This will have an adverse impact on growth and inflation in emerging and developing economies (EDEs), particularly on oil importing countries such as India, through a possible rebound in commodity prices.


* Though international crude prices have fallen significantly from their levels in April 2012, the rupee depreciation has significantly offset its impact on wholesale prices.


* Moderation in wholesale price inflation has not transmitted to the retail level. Notwithstanding the moderation in core inflation, the persistence of overall inflation both at the wholesale and retail levels, in the face of significant growth slowdown, points to serious supply bottlenecks and sticky inflation expectations.

Regards,

Arvind Trivedi

Certified Financial Planner


(The above article based on money control news)