India rates: RBI holds, Chidambaram waits

Indian Finance Minister P. Chidambaram (C) speaks as Coal Minister Sriprakash Jaiswal (L) and Law minister Salman Khurshid (R) look on during a joint press conference in New Delhi on August 24, 2012.Palaniappan Chidambaram, the Indian finance minister, will continue what he sees as his lonely battle to promote much-needed economic growth after the Reserve Bank of India left interest rates unchanged in its latest decision on Tuesday.

The central bank said in its mid-quarter policy review that it was leaving the policy repo rate unchanged at 8.0 per cent. Nor was there any change to the 4.25 per cent cash reserve ratio for banks.

The RBI remains concerned about inflation, especially stubbornly high retail inflation, although it did acknowledge that the pressure of wholesale price inflation and core inflation seemed to be easing.

Chidambaram and the rest of the Congress-led coalition government will now have to wait until January – at the start of the last quarter of the Indian fiscal year – for any boost to growth from falling interest rates. They will have been encouraged by the RBI’s cautious conclusion on Monday.

“Overall, recent inflation patterns and projections provide a basis for reinforcing our October guidance about policy easing in the fourth quarter,” said the RBI’s statement.

An impatient Chidambaram, who has been spearheading the government’s attempts to liberalise the economy and encourage foreign direct investment since he was reappointed to the finance ministry in August, has made no secret of his desire for faster action by the RBI.

“Growth is as much a challenge as inflation,” he said in frustration at the end of October. “If the government has to walk alone to face the challenge of growth, then we will walk alone.”

That solitary path may finally come to an end in the new year after five RBI meetings in row from which no change in the repo rate has emerged.

IHS Global Insight said it expected a cut of 50 basis points in the repo rate in January. For now, the RBI “has once again played it safe”, wrote Jyoti Narasimhan, senior India economist.

It may be some comfort to the finance ministry that the RBI tentatively agreed with the government’s conclusion on Monday that growth was bottoming out and should start to pick up in the second half of the financial year.

The finance ministry said gross domestic product was expected to rise 5.7-5.9 per cent in the 2012-13 year as a whole, well below the original budget forecast of 7.6 per cent but slightly better than the first half’s outcome of 5.4 per cent.

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