Industry disappointed, analysts shrug after RBI keeps interest rates unchanged

Industry has expressed its disappointment at the Reserve Bank of India’s decision to keep key interest rates unchanged, calling the move “deeply disappointing.”

The Assocham, which represents several big basic industries and manufacturers, said RBI should have made more money available for companies so that they could produce more, and bring down prices.

“The only way to beat inflation is to increase supply which can be brought about by augmenting production and investment. But, unfortunately, there is a one-way direction that the RBI has been following rather unsuccessfully,” it said in reaction to RBI’s decision to keep interest rates unchanged.

RBI has been following the classic method of keeping the money supply low to ensure that the value of money remains stable, in turn keeping a check on rising prices. India is facing a 10% annual rise in prices of key commodities such as food and fuel, making citizens angry.

RBI’s efforts to reduce prices by reducing the amount on money in the market has trimmed India’s industrial growth as well, with expansion falling to near-zero levels last month.

However, Dinesh Thakkar, Chairman & Managing Director of Angel Broking, felt that the risks of inflation is too high for the RBI to think of easing money supply.

“Headline inflation in the economy remains elevated at 7.5% and upside risks to inflation continue to persist. Going ahead, I believe that inflationary pressures are likely to be intensified due to the hike in diesel and LPG prices, increase in global liquidity flows and high commodity prices,” he said.

Everybody seemed to appreciate the move to give partial relief to the industry by the easing of the credit reserve ratio or CRR – the amount of cautionary money that banks are supposed to keep with them. “The 25 basis points cut in the CRR rate would somewhat address the problem of liquidity and the banks may also be prodded into marginally reducing the retail loan,” Assocham said.

While Assocham felt that the overall sentiment, which looked up after the Centre took “courageous reforms-friendly decisions” like FDI in multi-brand retail and hike in diesel prices, has been negated by the RBI inaction today, Thakkar said recent measures by the government towards fiscal consolidation are expected to uplift market sentiments and revive investment climate in the economy.