The decision of the Reserve Bank of India to keep the key rates unchanged in its mid-quarter monetary policy review does not seem to have gone down well with the market. Bank stocks closed in the negative territory and Bank Nifty of the National Stock Exchange closed lower by 273.20 points (3.24 per cent) to 8171.90. Axis Bank, Union Bank of India and Punjab National Bank lost more than five per cent. Other significant losers were HDFC Bank, State Bank of India, ICICI Bank and Bank of India.

Reacting to the RBI move, ICICI Bank's Managing Director and CEO Chanda Kochhar said the policy was a realistic assessment of the prevailing macro-economic situation. “This is a positive step, as growth has been moderating and inflation, though still above comfort levels, has started showing signs of easing. The policy statement has addressed concerns on the interest rate side by clearly indicating a likely reversal in the cycle with monetary policy actions being directed towards addressing growth-related issues going forward," she said.

M. Narendra, Chairman & Managing Director, Indian Overseas Bank, said that India had witnessed one of the longest spells of food inflation which often rose to double digits and spilled over to general inflation. To douse the flames of inflation, the RBI had fought valiantly over the past one year and nine months with repeated rate hikes and monetary tightening. In the process, economic growth had to be sacrificed when the country was all poised to rise to a higher trajectory. At last, the battle appeared to have been won with food inflation declining for the fifth consecutive week and general inflation trending down. ``However, the war remains to be fought. Only a massive, concerted supply side response can make a dent in the war against inflation,'' he said. The RBI action must be viewed in this background, Mr. Narendra said.

According to ING Vysya Chief Financial Officer Jayant Mehrotra, the RBI review highlighted the growing inflation-growth challenges faced by the policy-makers. “Although the inflationary risks would remain amidst a weak rupee, the focus will now be on how the growth trajectory pans out going forward,” he added.

Alok K. Misra, Chairman, Bank of India, said, “by keeping rates unchanged and not talking of any liquidity-enhancing measures, RBI has signalled that it remains single-mindedly focused on inflation.” He further said that the pause would help anchor inflationary expectations. Given the overall macro-economic environment, it should serve the economy well if RBI began its easing process, he added.

N. Kamakodi, Managing Director and CEO, City Union Bank, said the RBI had cited monetary policy tightening as one of the reasons for deceleration in economic growth. Some emerging economies such as Brazil and Thailand, however, had already cut their policy rates. “Given this, a similar action from our Central Bank is called for,'' he added. RBI prefers to address the present tight liquidity conditions which are above its comfort zone through OMOs as and when needed rather than by a CRR cut. Hence the decision of RBI has to be aptly termed as cautious in striking a proper balance between growth stimulation and price stability.

Focussed on inflation

Our Mumbai Special Correspondent writes:

Though the Reserve Bank of India's decision to keep the policy rates unchanged in its mid-quarter review was anticipated by markets, banks' lending rates are likely to remain firm.

“All indicators now point to RBI meeting fiscal year-end inflation targets. I foresee the banking sector to cut interest rates only when the RBI starts lowering the prevailing repo rates and the deposit rates drop. It could probably happen in the first quarter of calendar year 2012,” said Melywn Rego, Executive Director, IDBI Bank.

“The RBI clearly signalled that the policy rate is at its peak now. ,'' said Crisil, a leading rating agency. “With a reversal in monetary policy stance now expected due to moderating growth momentum and higher downside risks to growth, upward pressure on the benchmark 10-year government security (G-sec) yield is expected to ease. 10-year G-sec yield has already been easing in response to the RBI's open market operations (OMOs),” Crisil added.

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