The Reserve Bank of India (RBI) on Thursday adopted a hawkish stance on the eve of the Union Budget, leaving key rates unchanged in its mid-quarter monetary policy review and warned that “upside risks to inflation have increased” and that the “Centre’s fiscal condition has deteriorated” during fiscal 2011-12.
The central bank also made it clear that the future course of action on rates would be influenced by how inflation figures respond.
On the basis of the current macroeconomic assessment, the cash reserve ratio (CRR) of banks stands unchanged at 4.75 per cent of their deposits and the policy repo rate under the liquidity adjustment facility (LAF) stands at 8.5 per cent. Even as there were speculations that the RBI would likely reduce repo and reverse repo rates to boost growth, the central bank has decided to wait for the Budget and see what roadmap the government has laid in the direction of fiscal consolidation. “Notwithstanding the deceleration in growth, inflation risks remain, which will influence both the timing and magnitude of future rate actions,” the RBI said.
The recent growth-inflation dynamics had prompted the RBI to indicate that no further tightening is required and that future action would be towards lowering rates.
It also expressed concern over the fiscal situation of the government, saying, that “credible fiscal consolidation” would be important in shaping the inflation outlook.
Policy, polity pull Sensex down 243 points
The mood on Dalal Street turned bearish on the eve of the Union Budget. Bulls suffered a setback as the RBI refused to cut interest rates and the political situation arising from the Railway Budget prompted investors to turn cautious ahead of the Budget.
The BSE Sensex lost 243.45 points, or 1.36 per cent to close at 17,675.85 after touching a low of 17,622.13 points. In last four sessions, it had gained over 773 points. The 50-issue Nifty at the NSE dipped below the 5,400 level, down 83.40 points or 1.53 per cent at 5,380.50.
“Markets were expecting a rate cut and were disappointed by the announcement of status quo,” said a dealer.