The Reserve Bank of India’s (RBI) move to leave the repo rate unchanged at 6.25% has surprised many, but chief economic adviser Arvind Subramanian called the decision “bold and brilliant”.
It was “bold”, since it was taken despite high expectations of a rate cut, Subramanian said. The move was well thought out and also signals stability of policy in the foreign exchange market, especially since it comes at a time of rising interest rates globally and declining capital flows, he added.
“It’s worth waiting for a month or two to see what happens and understand the situation and take a more considered decision...You don’t want monetary policy to react to all ups and downs of the economy.”
He also said that the reduction in repo rate would have given contradictory signals to banks, especially at a time when the central bank has hiked the cash reserve ratio (CRR) -- the proportion of deposits banks have to mandatorily park with RBI. The central bank had increased CRR to 100% after the government announced its demonetisation drive to help absorb the excess liquidity with banks. It, however, withdrew the 100% requirement in its policy review on Wednesday.
“It is surprising that RBI decided not to reduce rates, given that the current demand condition is weak. But it is a welcome move that the hike in CRR has been withdrawn,” Soumya Kanti Ghosh, chief economic adviser, State Bank of India, told HT.
Economists said the easing of CRR could provide the required headroom to banks to reduce interest rates, even as the repo rate remained unchaged. “ (The move) suggests that the focus has undoubtedly shifted back to inflation from growth concerns...This would provide banks with the scope to still cut lending rates despite the pause on the repo rate,” said Naresh Takkar, MD and group CEO, ICRA.