At a time when data from CSO shows that retail inflation continues to be double digits and global credit rating agencies, one after the other are downgrading their outlook on the Indian economy, citing growing risks to the economy’s growth in absence of structural reforms; the RBI contrary to all the din and noise for a rate cut, held its nerve and kept the lending rates and CRR unchanged. The move took the financial markets by surprise; the market, which had expected a rate cut, was left stunned, and pulled the Sensex down by 244 points and the rupee to 55.92. However, a rate cut at this juncture would have exacerbated inflationary pressures rather than helping growth. RBI, which raised its lending rate 13 times between March 2010 and October 2011 to fight inflation before reversing the cycle, said its “assessment of the current growth-inflation dynamic is that there are several factors responsible for the slowdown, particularly in investment, with the role of interest rates being relatively small.”
Given the fact that India is flirting with stagflation, economists have cheered the status quo; however, industrialists who blame high interest rates for sluggish growth were disappointed. In fact, industry bodies CII and FICCI expressed their disappointment at the RBI’s monetary policy stance. Their argument is based on the premise that when the GDP is steadily declining, a very inflation-centric policy measure appears to have missed the bigger picture. As for the bankers, the status quo implies that they too will not cut either deposit or lending rates for now.
As for consumers, with retail prices rising above 10 percent and repo rates at 8 percent, those who save money in banks, are earning negative returns since the gains in prices erodes the value of returns.