Finance Minister Pranab Mukherjee on Friday maintained that the Reserve Bank's decision to press the pause button and keep its key policy rates unchanged would help improve business sentiments to get the growth momentum back on track with inflation moderating in the coming weeks.

Lauding the change in RBI's policy stance in the wake of a marked slowdown in industrial growth while inflation has been on a declining trend, Mr. Mukherjee said: “The need to improve the business sentiments and recover the growth momentum in the remaining months of the current fiscal necessitated a review of the monetary policy stance… I believe that inflation will moderate further in the coming weeks and, therefore, the announcement today is welcome.''

As had been indicated earlier during its monetary policy review, the RBI chose to maintain its policy rates, namely the repo (short-term rate at which banks borrow from it) at 8.5 per cent. Automatically, the reverse repo (rate at which banks park short-term funds with the apex bank) also remained unchanged at 7.5 per cent.

The Finance Minister hoped that the change in policy stance owing to growth concerns would help in regaining the growth momentum with improved macro economic parameters in the remaining months of the fiscal year.

“[The RBI] Governor has chosen to reflect his concerns on growth which has faltered in the past few months with October IIP [index of industrial production] reflecting a significant contraction across all industry sectors,” the Finance Minister said.

Alongside, Mr. Mukherjee also hailed RBI's action on Thursday aimed at checking the rupee slide. “I also welcome the Governor's resolve to check the speculative interventions in foreign exchange market which among other factors have contributed to the sharp depreciation of the Indian rupee against the U.S. dollar,” he said.

In his comments on the RBI's policy stance, Prime Minister's Economic Advisory Council Chairman (PMEAC) C. Rangarajan noted that it was on in keeping with expectations. “...the move is on expected lines...if inflation continues to show a declining trend, then perhaps the RBI will start reversing its policy.

“Therefore, it is predicated only on one assumption and that is the inflation going down…particularly food prices will come down more sharply as we have indicated, not only in December but in January as well.”

“The impact of the base effect will be seen as food prices generally come down in winter season... so I do believe inflation will come down sharply and that might provide the correct environment in which the RBI can act further in the direction of easing action,” Dr. Rangarajan said.

India Inc. also found the easing in the apex bank's stance reassuring and appreciated its commitment to address the slowdown in growth. “The RBI's guidance that monetary policy actions from now on will respond to the slowdown in growth is reassuring,” said CII Director General Chandrajit Banerjee. FICCI Secretary General Rajiv Kumar also viewed that the indications of a reversal in rate cycle by the RBI is “a clear departure from the monetary tightening phase”.

CII, however, felt that the RBI's policy action did not reflect the urgency of the situation, especially in view of the contraction in industrial growth and subdued investment outlook.

“Given that the need for improving sentiments and to stimulate growth is urgent, the RBI could have used the current opportunity to send strong signals that growth will not be sacrificed further even while inflation is being controlled,” Mr. Banerjee said.


Reserve Bank takes a pause to keep up vigil December 17, 2011

RBI rate pause, no non-event December 18, 2011

RBI leaves rates unchangedDecember 16, 2011

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