The RBI has refrained from lowering interest rates in its first monetary policy statement in the new fiscal. Given that it had already undertaken two rounds of repo rate reductions of 25 basis points each this year, a further cut was really not on the cards. Moreover, banks have so far not passed on the benefit of the earlier policy rate reductions; though SBI, HDFC Bank and ICICI Bank did announce up to 25 basis point cuts after much prodding on Tuesday. The RBI, to that extent, had reason to wait for the “monetary transmission” of its rates to lending rates by banks to happen before going for further cuts. Besides, these cuts can happen even outside its scheduled bi-monthly policy reviews — as was the case both in mid-January and early last month.
While one can understand the RBI’s move to keep its repo rate unchanged for the moment, it could, nevertheless, have considered bringing down the CRR requirement for banks. Currently, for every Rs 100 of deposits they receive, banks have to park Rs 4 with the RBI, which does not pay them any interest on this impounded money. Such a tool for sucking out a portion of bank deposits that would ordinarily have been lent out and earned interest is a relic of the pre-reform monetary policy era. In a liberalised economy, where the RBI can increase or decrease money supply through open market operations and also influence interest rates by raising or lowering its policy repo/ reverse repo rates, the CRR as a means for controlling credit creation should be employed only in extraordinary circumstances. In the present situation, a 25 basis point CRR cut would have freed up over Rs 23,000 crore of lendable resources for banks. This additional liquidity could have led them to reduce lending rates, even while earning something on the monies thus released. It would also have been an effective way to ensure monetary transmission at the banks’ level.
The other not so heartening signal from the latest policy review is the RBI’s prognosis of consumer price inflation, which is seen to moderate from the current 5.4 per cent to around 4 per cent towards August and then rise to 5.8 per cent by the end of 2015-16. The basis for these projections isn’t clear: Can anybody predict at this point how the next monsoon is going to be or where vegetable prices are headed in the coming months? But the emphasis on the upside risks to inflation by the RBI is sufficient ground to expect no significant rate cuts ahead — which isn’t good for the economy.