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Updated: December 17, 2011 10:32 IST

Reserve Bank takes a pause to keep up vigil

K. T. JAGANNATHAN
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The Reserve Bank of India's decision not to act now on the interest rate front in the mid-quarter monetary policy review has hit the bourses hard. File photo
The Hindu The Reserve Bank of India's decision not to act now on the interest rate front in the mid-quarter monetary policy review has hit the bourses hard. File photo

Every action has an equal and opposite reaction. Sometimes, no action too can trigger panic reaction.

The Reserve Bank of India's decision not to act now on the interest rate front in the mid-quarter monetary policy review has hit the bourses hard. Bulls and bears of the stock markets are of different animals. Their behaviour, often times, defies any rational expectation. Yet, the slump in shares prices across markets on Friday is a reflection, nay endorsement, of an across-the-board disappointment over the apex bank's strident position on the interest rate front.

The decision to maintain the status quo on interest rates appears ironical if one were to go by the apex bank's own submission in its policy review. “While inflation remains on its projected trajectory, downside risks to growth have clearly increased,'' the RBI said. In view of the moderating growth momentum and higher downside risks to growth, the central bank has reiterated that “further rate hikes might not be warranted.'' The RBI gave this indication in the Second Quarter Review. It is reiterating it now. But then it has added a rider to this. “It must be emphasised that inflation risks remain high and inflation could quickly recur as a result of both supply and demand forces. Also, the rupee remains under stress. The timing and magnitude of further actions will depend on a continuing assessment of how these factors shape up in the months ahead,'' the RBI warns.

The apex bank clearly is not willing to drop the guard anytime soon. The tightening of norms for forward contracts on Thursday clearly had the effect when the rupee closed a tad stronger against the dollar. The rupee continued to inch up on Friday too. Though India has been hearing about the slowdown strains in the economy for quite sometime now, the 5.1 per cent dip in the industrial production number for October has taken policy planners and authorities in the government totally off guard.

Reports suggest that the third quarter advance corporate tax paid by companies for this fiscal has remained flat.

Against a series of none-too-encouraging news, a view is now gaining ground that the RBI might quietly resort to ‘open market operations' to inject liquidity into the system. Well, the time appears to be running out. A decisive action is the need of the hour.

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