With inflation remaining high in September, it will be difficult for the Reserve Bank of India (RBI) to reduce the key policy rate to give a push to sagging economic growth. Bankers and analysts said the government had sent a clear signal to slash interest rates to kickstart growth. For RBI, however, fighting inflation remains top priority, making revising the repo rate tough.
IDBI Bank Chief General Manager (Treasury) N S Venkatesh said the current reading of inflation and the trade deficit did not provide room for the repo rate cut in the second quarter review.
The option before RBI is to reduce the cash reserve ratio, the amount banks keep in cash with RBI. It had kept the repo rate — at which banks borrow from RBI — unchanged at eight per cent in the mid-quarter review in September.
RBI, however, had cut CRR by 25 basis points from 4.75 per cent to 4.50 per cent. This led to the injection of Rs 17,000 crore into the banking system.
Inflation rose 7.81 per cent in September from a year earlier as prices of potato, pulses, wheat and sugar soared. The impact of increase in diesel prices is partly reflected in the figures.
Leif Eskesen, chief economist for India & Asean, HSBC, said, “Headline inflation rose more than expected and core inflation remains firm. This ought to make RBI careful about easing the rates until inflation risks have receded sufficiently and fiscal policy is back on track”.
Inflation soared after the government increased diesel prices by Rs 5 a litre on September 13. The recent appreciation in the rupee, if sustained, is likely to relieve some pressure from core inflation in the coming months.
Rating agency CRISIL said overall wholesale price index inflation will continue to remain significantly above RBI’s comfort level of five per cent for the foreseeable future. It will be difficult for the central bank to administer a repo rate cut in its coming policy review.
Barclays said policymakers remain in a tough spot – constrained by high inflation but with a clear need to support growth over the medium term. Core inflation, at over 5.5 per cent, remains a constraint for RBI policy rates.
Of late, the upward adjustment in fuel prices, the slew of other policy initiatives from the government and a pullback in the rupee have offered RBI some breathing room.
The central bank will reduce the repo rate in Q1 2013.
It will continue to focus on supporting liquidity in the near term, with the possibilities of employing open market operations (OMOs) and also reduce CRR, Barclays said.
