Justifying the decision of the Reserve Bank to keep key policy rates unchanged to check inflation, Prime Minister's economic advisor C Rangarajan today said interest rate cut would have given a wrong signal.
"The efforts of RBI were best to contain inflation. RBI has struck an appropriate balance to control inflation and to provide stimulus to growth. Repo rate cut would have sent a wrong signal since inflation is high," said Rangarajan, Chairman of the Economic Advisory Council to the Prime Minister (PMEAC).
Ignoring the rate cut demand of India Inc, RBI in its first quarter monetary policy review kept the short-term lending (repo) rate, at which banks borrow from RBI, unchanged at 8%.
The Reserve Bank's policy stance was guided by wholesale price based inflation which was 7.25% in June. The inflation at the retail level during the month was in double-digit at 10.02%.
The central bank, however, announced 1% cut in the Statutory Liquidity Ratio (SLR), the amount of deposits banks park in government bonds, to 23% to infuse liquidity into the system.
"A cut in statutory liquidity ratio (SLR) will inject liquidity into the system and it will also prevent crowding out of large government borrowing," Rangarajan said.
RBI also lowered the economic growth projection for the current fiscal to 6.5% from 7.3% earlier and raised inflationary forecast to 7% from 6.5% earlier mainly on account of deteriorating domestic macroeconomic situation and global slowdown.
Other economists too held similar views and justified the cautious approach of the RBI.
"RBI has limited headroom (to cut repo rate) as inflation is high and is being aggravated by uncertain monsoon. So in this context, RBI has done the best to ensure that inflation remains under control," said Brinda Jagirdar, Economist, State Bank of India.
She said RBI's move to cut GDP growth forecast and upward revision in inflation projection was 'realistic' but 'worrisome'.
"I find it worrying, inflation is a big concern. The government needs to be proactive towards policy actions and infuse confidence in the industry," Jagirdar said.
Although, RBI move to keep the key interest rates unchanged was on expected line, cut in SLR was a bit surprising, said Jyotinder Kaur, Economist, HDFC Bank.
"It indicates RBI is concerned about growth, flow of credit and liquidity. It shows that RBI will not support growth at the cost of inflation.