Even as India Inc. clamouring for easing of interest rates cried foul with the Reserve Bank of India (RBI) opting for a status quo yet again, Prime Minister’s Economic Advisory Council (PMEAC) Chairman C. Rangarajan, on Tuesday, maintained that a rate cut by the apex bank would have sent a wrong signal.

In defence of the central bank’s decision to keep its key policy rates unchanged in the wake of a continuing sticky inflation, Dr. Rangarajan said: “The efforts of RBI were best to contain inflation. RBI has struck an appropriate balance to control inflation and to provide stimulus to growth. Repo rate cut would have sent a wrong signal since inflation is high”.

Justifying the RBI’s action to hold its short-term lending (repo) rate at 8 per cent while easing the SLR (statutory liquidity ratio) by one percentage point to 23 per cent as a measure to infuse liquidity, the PMEAC chief said: “A cut in statutory liquidity ratio will inject liquidity into the system and it will also prevent crowding out of large government borrowing”.

Planning Commission Deputy Chairman Montek Singh Ahluwalia viewed the RBI action as a cautious stance on account of the sticky inflationary trend. “As far as looking ahead is concerned, the RBI has taken a slightly cautious stance because of its concerns that inflation is sticky. I have no difficulty with that…They [RBI] are looking [at a situation] that if the monsoon does not improve, then there may be some pressure on that [inflation] front. On the RBI scaling down the GDP growth projection for this fiscal to 6.5 per cent from 7.3 per cent estimated earlier, Mr. Ahluwalia said: “As far as reduction in growth rate is concerned, I agree that growth rate is going to be lower than what was projected at the time of budget…They have chosen 6.5 per cent [GDP growth for this fiscal], I think that is quite reasonable. If we grow at 6.5 per cent in the current year, then it will be actually a good performance.”

Even the Finance Ministry’s Chief Economic Advisor Kaushik Basu maintained that the RBI’s decision to hold its rates unchanged was the right move to check the price spiral. “My expectation is that inflation in September will go below 7 per cent …RBI has said pause. RBI has made a right move and the lowering of SLR is a very important small move [will] give right indication,” Dr. Basu said.


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