Reserve Bank of India (RBI) Governor Y.V. Reddy had a unique plan to deal with the jitters about the economy: do nothing.
In the Credit Policy unveiled on Tuesday, Reddy did not touch any key rates — neither the rate at which it lends to banks, nor the minimum percentage of deposits banks need to keep in reserve. Analysts say it’s the best thing he could have done to send out the message that India is an island of stability amid worries of a global economic slowdown.
“Growth has exhibited signs of moderation, but not a significant slowdown. Keeping interest rates unchanged, not panicking even in the backdrop of heightened external imbalances exhibits prudence on the part of the RBI,” said Rana Kapoor, MD and CEO of Yes Bank.
The balancing act, between growth and stability, was required, said experts.
The concerns that remain are global, such as the effects of the sub-prime crisis — massive defaults on high-risk, high-interest loans given to individuals with poor credit ratings — in the US, as well as domestic, like a possible rise in inflation on the back of a fuel price hike and high foreign inflow of funds following the lowering of interest rates in the US.
“The RBI has shed its hawkish stance, but concerns about foreign inflows and inflation stay,” said Jayesh Mehta, MD and head of the Institutional Client Coverage Group, DSP Merrill Lynch. He, however, hastened to add that the flood of foreign money everybody expects may not come soon as borrowing rates abroad have risen by 0.6 per cent despite the recent 0.75 per cent rate cut in the US.
The danger with huge foreign fund inflows is that it leads to a lot more cash in circulation, pushing up inflation. “Unlike the US Federal Reserve, the RBI did not succumb to market pressure for a rate cut,” said Devendra Nevgi, CEO, Quantum Mutual Fund.