At a time when the US Federal Reserve has cut its rate three times since September 18, the Reserve Bank of India (RBI) has left its policy rates — CRR, repo, reverse repo and bank rate — untouched. Meanwhile, credit growth is falling, which is expected to impact GDP growth rate. Economists believe 2008-09 should see over a 100 basis points shaved off India’s GDP growth to 8 per cent or thereabouts. A cut in the repo rate (the rate at which RBI lends money to commercial banks, currently at 7.75 per cent) would have helped, but in the RBI’s and the government's opinion, that would have pushed inflation higher.

Already, the price of oil has been on the rise, as have been prices of other global commodities including food. RBI's cautious stand is: “The policy endeavour would be to contain inflation close to 5 per cent in 2007-08 while conditioning expectations in the range of 4-4.5 per cent.” The credit and deposit growth have flipped places from the previous year. In January 2007 credit growth and deposit growth stood at 31.9 and 21.5 per cent. Now they stand at 22.2 and 23.8 per cent. Thus, credit growth is down and stands below the deposit growth rate.

A concern that looms large is that if India's interest rate differential widens significantly with that of the US, it would head towards a situation where the RBI will have to go for steep cuts. Economists are of the view that the RBI does not need to cut rates the way the US has been doing. However, they also expect that the rates should move in the same direction. If past parallels between US Fed rate cuts and RBI cuts are seen, one can figure out that Indian interest rate cycles have lagged behind that of the US by two to 18 months.

... contd.