The Reserve Bank of India kept its lending rates unchanged on Monday, fearing a rate cut could knock up inflation. But a few hours later, US credit rating agency Fitch Ratings came out with a negative rating for India.
The negative rating means a warning that growth could deteriorate if
immediate measures weren’t initiated. And when the growth rate falls, it is usually expected that the central bank cut interest rates to boost demand and spending.
A policeman stands guard outside the head office of the Reserve Bank of India (RBI) in Mumbai. (AFP PHOTO/Punit Paranjpe)
The step also rattled stock markets, resulting in a 244-point drop in the 30-share Sensex on Monday. The rupee also breached the 56-to-a-dollar mark, following the Fitch report, before closing 53 paise down at a more than two-week low of 55.93.
The RBI’s action, or the lack of it, would imply that if you are an existing home loan borrower, don’t expect your EMIs to come down soon.
The RBI argued that rise in purchase of goods, prompted by lower rates, will only help push up prices at this point. “Further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures,” said RBI governor D Subbarao.
But Rajiv Kumar, secretary general of industry association Ficci, said, “The RBI’s decision to not reduce the repo rate is even more difficult to understand.”
The government brushed aside Fitch’s concerns. “Its (Fitch’s) concerns about the economic growth, inflationary pressures and weak public finances are not placed in the context of the present state of the global economy and are based on older data,” said finance minister Pranab Mukherjee.
“There is a herd mentality among policy makers and corporates. There is also little bit of herding among credit rating agencies. We were pretty much expecting Fitch to do so,” Kaushik Basu, chief economic advisor, said.
Last week, Standard & Poor's downgraded India’s credit outlook and warned that the economy could be the first of the BRIC emerging economies to lose its investment-grade classification unless it revived growth and resume reforms.