RBI’s middle game
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That rates remain unchanged could indicate it was given no clear political message
The Reserve Bank of India has decided that data on growth slowdown is still mixed but that on inflation is clear with prices still raging high and so it has prescribed a standstill on rates. Monday morning's treatment sent the stock market reeling with investors correctly anticipating that the prevailing high rates will pull down sales of automobiles and consumer durables too, about the only two sectors holding up demand when all others, including capital goods and intermediates, have shrunk. What worried the market was not the status quo but a hawkish stance on inflation in the mid-quarter monetary policy review that augurs minimal change for July too.
On a day when Fitch too moved India's outlook to negative from stable, the RBI's basket of concerns seems misplaced. The bank has argued that growth slowdown is not primarily due to high interest rates, a point well taken. It has also argued that a 50 basis point rate cut in April was made expecting a corresponding response from the fiscal policy to arrest inflation, like a cut in subsidies, which has not happened.
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