Clamouring for an RBI Cut, India Inc is now Cut Up

Industrialists cry foul as Guv Subbarao keeps focus on inflation; tumbling markets scare off panicky investors

The Reserve Bank of India kept interest rates unchanged on Monday, ignoring the widespread chest-beating over an economy at stall speed, and sending a clear signal that its focus is on fighting rising prices squeezing the lives of millions of Indians. 
Governor Duvvuri Subbarao, who appears to have made a habit of doing the unexpected and leaving the markets nonplussed, also did not cut the cash reserve ratio. The CRR stipulates the portion of deposits that banks must keep with the central bank. 
Stocks, bonds and currencies fell. Economists cheered the status quo, but industrialists, who blamed high interest rates for sluggish investments, were furious. 
The RBI said a cut in rates would fuel inflation instead of aiding economic activity since most investments are stalled due to 'several factors', a not-so-subtle reference to policy inertia at the government level. "The persistence of overall inflation both at the wholesale and retail levels, in the face of significant growth slowdown, points to serious supply bottlenecks and sticky inflation expectations," the RBI statement said. 
The central bank also gave no indication about its next course of action, triggering speculation that the next cut may be as far away as October unless the global economy plunges into crisis, or the government moves swiftly to fix its finances."The CII and industry are disappointed by the monetary stance taken by the Reserve Bank of India," said Chandrajit Banerjee, director-general at the Confederation of Indian Industry (CII). 
Why No Rate Cut 
Prices are climbing 
again since output is not matching demand. A rate cut would further drive up demand, and in turn infl ation 
RBI says it's not 
just high cost of funds, but 'several factors' that are affecting investments, hinting at policy paralysis 
A rate cut would 
aggravate problems since it is a disincentive to savers. Lending rates adjusted for inflation are still low 
Resolving the EU crisis 
by printing more money could add to India's price worries as commodity prices will rise 
With deposit growth lagging loans, 
banks wouldn't be able to cut rates despite a repo rate cut Many Factors Responsible for Slowdown: RBI 
"It needs to be understood that with a steadily declining GDP growth, millions of livelihoods are under threat and, therefore, a very inflation-centric policy measure appears to have missed the bigger picture," said CII's Chandrajit Banerjee. 
The Reserve Bank of India (RBI) kept the repo rate — the rate at which it lends to banks — at 8%, and the CRR at 4.75%. But it raised banks' export refinance limit to 50%, from 15%, which could potentially release . 30,000 crore into the system — equivalent to half-a-percentage point cut in the Cash Reserve Ratio. But the move won't have a similar impact as banks don't avail of this facility much. 
"There are several factors responsible for the slowdown in activity, particularly in investment, with the role of interest rates being relatively small," the RBI said in a statement. "Further reduction in the policy interest rate at this juncture, rather than supporting growth, could exacerbate inflationary pressures." 
The central bank, after doling out a 50-basis-point cut in repo rate in April, cited rising consumer prices and the nonreflection of lower manufacturing inflation in retail prices. Low administered prices of petroleum products and coal could fuel inflation once their prices are raised. 
Also, the low deposit growth compared to high demand for loans leaves little room for the central bank to ease rates since banks won't be able to pass on the cut. 
"The lending rates really depend on the cost of funds, which does not only depend on the repo rate but also the overall liquidity and deposit growth rate and cost of deposits," said Chanda Kochhar, managing director and chief executive at ICICI Bank. "A 75-basis-point cut is the kind of reduction I thought would happen in the year and 50 basis points was front-loaded in any case." A basis point is 0.01 percentage point. 
The BSE Sensex fell 1.4% to 16,706 points, off its peak of 17,110. The 10-year benchmark bond yields rose 8 basis points to 8.16%. The rupee fell 51 paise to 55.93 versus the US dollar. 
"Today's statement had virtually no guidance for the period ahead, but we see no reason for the RBI's resolve to waver," said Taimur Baig, economist at Deutsche Bank. "Unless there is dramatic deterioration in external or domestic risk factors, the central bank would likely remain on the sideline until inflation eases appreciably." 
The RBI has been critical of government finances for more than a year now after the fiscal deficit shot past its target and there were signs of the Centre reining in its profligacy. The government's mandatory employment programme and regular increases in minimum prices for food products are seen to be inflationary. 
"Delhi and Mumbai are two horses that pull this economy carriage," said KVS Manian, president (consumer banking) at Kotak Mahindra Bank. "The Delhi horse cannot transfer the entire burden to the Mumbai horse." 
With consumer prices rising above 10% and repo rates at 8%, those who save money in banks are earning negative returns since the gains in prices erodes the value of returns. 
The nominal return of 9% from bank deposits are low since depositors are indeed losing 1 percentage point which the economists call negative real interest rate. Conversely, borrowers are subsidised by savers. 
"Real effective bank lending interest rates, though positive, remain comparatively lower than the levels seen during the high growth phase of 2003-08," said the Reserve Bank of India. "This suggests that factors other than interest rates are contributing more significantly to the growth slowdown."