Shifting his stance from inflation management, Rajan said continuing weakness in economic growth was the main driver of his policy action.
“We are happy that RBI has taken cognisance of the weak state of the industrial economy and hope that the next move will be in the direction of lowering of policy rates. At this juncture, we certainly need to push all buttons to safeguard growth and revive investor sentiment,” Ficci President Naina Lal Kidwai said.
Enthused by the policy announcement, the stock markets reacted positively. The benchmark BSE Sensex climbed for the first time in seven days and closed at 20,859.86, up 247.72 points.
Bank of India Chairperson V R Iyer concurred that there is no room to cut lending and deposit rates at the moment. “Inflation is very high and there is hardly any scope for us to reduce the interest rate on deposits, at least at the year end. Absolutely, we will not be able to do that at the moment. But the bulk deposit rate we will be able to take a call and reduce the rate,” Iyer said.
“Immediately, there will not be any room for us to reduce the base rate,” she added.
On inflation, Rajan said, “There are indications that vegetable prices may be turning down sharply, although trading mark-ups could impede the full pass-through into retail inflation.” The other respite for the RBI is the improvement in the current account deficit (CAD), which narrowed to 1.2 per cent of GDP in the second quarter after a steep decline in gold imports. The CAD was 4.9 per cent of GDP in the first quarter (April-June).
“I would be much happier if we had the kind of CAD we have without significant curbs on anything, including gold. We should aim to have a CAD without any distortions, removing the incentives for smuggling, that is what we will be working for,” Rajan said.
