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Monday, November 10, 2014

RBI not ready to cut rates despite inflation dip

Inflation may be down, but the RBI is not in a hurry to lower interest rates.

According to Reserve Bank of India Deputy Governor HR Khan, structural issues such as high input costs, rising wages, and elevated food prices were complicating the fight against price rise. Rural areas faced supply chain issues too, he said at a CFO summit organised by the CII.

The Deputy Governor’s comments, though coming in the backdrop of the consumer price index inflation for September hitting a near three-year low of 6.46 per cent, can be interpreted to mean that the RBI is not ready to cut the key policy, or the repo, rate at which the central bank provides short-term funds to banks.

The fifth bi-monthly monetary policy review is scheduled for December 2. The central bank has kept the repo rate unchanged at 8 per cent in the last four policy reviews, beginning April 1, fending off pressures from India Inc. The RBI has blamed high and persistent inflation for its reluctance to oblige.

With international crude prices softening and a relative stability in the foreign exchange market, upside risks to inflation are definitely receding.

However, the RBI warned that there are risks from food price shocks as the full effects of the monsoon are yet to unfold, and from geopolitical developments.

In its fourth bi-monthly monetary policy statement, the RBI had said inflation has ebbed to levels consistent with the desired near-term glide path of disinflation — 8 per cent by January 2015. But playing down the demands of a rate cut, RBI Governor Raghuram Rajan had in August said: “Let’s fight the anti-inflation fight once and let’s win; that will create the best conditions for sustainable growth.”

PTI adds: Stating that he is “chastened” by the massive jump in foreign investments by India Inc, Khan chided corporations for not doing enough research before taking their decisions, as many had had to exit such investments in distress.

“You’ve gone without proper research, due diligence and adequate planning. So you now see a large-scale disinvestments of such assets happening,” he said.

Reeling out data pointing to a rise in outward FDI (foreign direct investment) in the last four years, Khan said he was a “champion” of the phenomenon, but is now “slightly chastened” by the experience.

Source : The Hindu


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