Halt in rate hikes by RBI on expected lines: PMEAC chairman

“The impact of the base effect will be seen as food prices generally come down in winter season... so I do believe inflation will come down sharply and that might provide the correct environment in which the RBI can act further in the direction of easing action,” PMEAC chairman C Rangarajan said

New Delhi: Prime Minister’s Economic Advisory Council (PMEAC) chairman C Rangarajan today said the Reserve Bank of India’s (RBI) move to keep all the key policy rates unchanged in its mid-quarterly policy review is on expected lines and the central bank might start revising downwards its monetary stance only if inflation continues to decline further, reports PTI.

“...the move is on expected lines...if inflation continues to show a declining trend, then perhaps the RBI will start reversing its policy. Therefore, it is predicated only on one assumption and that is the inflation going down,” Mr Rangarajan said.

He added that inflation will start declining, “particularly food prices will come down more sharply as we have indicated, not only in December but in January as well”.

“The impact of the base effect will be seen as food prices generally come down in winter season... so I do believe inflation will come down sharply and that might provide the correct environment in which the RBI can act further in the direction of easing action,” he said.

In its policy review today, the RBI maintained repo (rate at which banks borrow from RBI) at 8.5%, and reverse repo (rate at which the RBI borrows from banks) at 7.5%.

The halt to increase in interest rates comes after the RBI hiked the rates 13 times since March 2010.

The RBI has also decided to retain the cash reserve ratio (CRR), the amount banks need to park with the RBI, at 6%. Industry was expecting a marginal cut in the CRR to induce liquidity in the system to promote investments.

Meanwhile, Planning Commission deputy chairman Montek Singh Ahluwalia declined to comment on the RBI’s policy stance.

“If there is no change (in policy rates), then what is there to comment on. I don’t want to speculate (on the impact of the pause),” he said.

The RBI will make an assessment of its growth and inflation projections for 2011-12 in the third quarter review next month, the policy statement said.


India against freezing duties, removal of farm export control

“The freezing customs duties amounted to the developing countries ceding their policy space and being denied any recognition for their autonomous liberalisation,” commerce and industry minister Anand Sharma said at the G-20 ministers’ meeting in Geneva

Geneva: India on Thursday rejected proposals of some developed nations to freeze customs duties at current levels (tariff standstill) and taking away rights to ban farm exports as a possible way forward on World Trade Organisation (WTO) talks, saying that if accepted it would tantamount to ceding sovereign rights, reports PTI.

“This (freezing customs duties) amounted to the developing countries ceding their policy space and being denied any recognition for their autonomous liberalisation,” commerce and industry minister Anand Sharma said at the meeting of the Group of Twenty (G-20) ministers here.

Mr Sharma, who is here to participate in the eighth Ministerial Conference of WTO, said that any dilution of the flexibilities available under the WTO regime for imposing export restrictions on agricultural items and taxes was ‘unacceptable’.

The WTO negotiations have been stalled due to differences between rich and developing nations on tariff liberalisation and level of market opening.

Agreeing to tariff standstill means a drastic reduction in duties by developing countries like India, as the country’s applied customs duties is below bound ceiling levels.

To augment domestic supplies, India has banned exports of pulses and also imposed quantitative restrictions on outward shipments of commodities like rice and sugar. Besides, India is planning to bring a food security law under which nearly 64% of its population will have legal entitlement on subsidised foodgrain.

The conference, the highest policy-making of the 154-member WTO body, is meeting to deliberate how to revive the stalled talks for achieving a global trade agreement under the 10-year old Doha Round.

Mr Sharma further said, “It was imperative that the WTO while taking up all manner of new challenges does not forget the traditional challenge of development.”

He called for continued solidarity and reinvigorated engagement so that the current impasse in the Doha negotiations is broken and the attempts to replace the development centric agenda are thwarted.

In his intensive consultations with developing and developed countries, to evolve a common position on the way forward on the Doha Development Agenda, Mr Sharma said India views WTO as an institution to provide a level-playing field in the global trade.

At the meeting of the G-33 countries (a coalition of agricultural economies) he urged for ushering in much delayed changes in the current agricultural trading regime which negatively impact the livelihood concerns of billions of subsistence farmers in the developing world.

Mr Sharma also addressed a gathering of delegates of the G-90 (poorest and smallest developing countries) and Brazil, China and South Africa.

The unique grouping of over 100 countries called the ‘Friends of Development’ reaffirmed their commitment to the centrality of development in Doha Round and the need to keep negotiations transparent and inclusive.

The grouping issued a declaration committing their desire to take forward the Doha Development Agenda without deviating or diluting the core of the round.


RBI keeps repo, reverse repo, CRR and SLR unchanged

As correctly predicted by Moneylife, the central bank had kept repo, reverse repo, CRR and SLR rates unchanged and said that from now onward its actions would respond to the risks to growth

The Reserve Bank of India (RBI) in its mid-quarterly monetary policy review on Friday, kept the repo and reverse repo rates unchanged at 8.5% and 7.5%, respectively. It also did not revise the cash reserve ratio (CRR), which stands at 6% and the statutory liquidity ratio (SLR) at 24%.

Analysts had opined that in view of the slowdown in the economy on account of rising interest rates and the global situation the central bank may take a pause this time. (Read...RBI may take a pause by keeping policy rates unchanged)

While accepting that there is deceleration in growth due to past monetary policy tightening and domestic policy uncertainties, the RBI, said, “From this point on, monetary policy actions are likely to reverse the cycle, responding to the risks to growth.” 

“However, it must be emphasised that inflation risks remain high and inflation could quickly recur as a result of both supply and demand forces. Also, the rupee remains under stress. The timing and magnitude of further actions will depend on a continuing assessment of how these factors shape up in the months ahead,” the central bank said in a statement.
According to the RBI, liquidity conditions have remained in deficit during this fiscal year in consistent with the stance of its monetary policy. However, the deficit increased significantly beginning the second week of November 2011. The average borrowings under the daily liquidity adjustment facility (LAF) increased to around Rs89,000 crore during November-December (up to 15 December 2011) from about Rs49,000 crore during April-October 2011. The Reserve Bank conducted open market operations (OMOs) on three occasions in November-December 2011 for an amount aggregating about Rs24,000 crore to ease liquidity conditions.
Allaying the fears of stress in money market, the central bank said there are currently no significant signs of stress as the overnight call money rate are stable around the policy repo rate and liquidity facilities such as marginal standing facility (MSF) remain unutilised. It however, said that in view of the fact that borrowings from the LAF are persistently above the Reserve Bank's comfort zone, further OMOs will be conducted as and when seen to be appropriate.
 In October, the RBI, for 13th time since March 2010, increased repo (the rate at which the RBI lends money to banks) and reverse repo (the rate at which the RBI borrows from banks) rates by 25 basis points (bps) each to 8.5% and 7.5%, respectively to control inflation. The series of rate hikes has cumulatively increased interest rates by 525 bps in the last 20 months.
WPI inflation moderated to 9.11% year-on-year (y-o-y) in November from 9.73% in October, slightly higher than market expectations due to sharp deceleration in food inflation and stable manufacturing inflation. However, non-food manufactured inflation (which the RBI refers as core inflation) increased in November to 7.9% from 7.6% in October due to an increase in the prices of metals (1.5% month-on-month or m-o-m), chemicals (0.4% m-o-m) and non-metal minerals (0.9% m-o-m).
For the week that ended on 3rd December, food inflation fell to a nearly four-year low at 4.35% reflecting a decline in prices of essential items like vegetables, onions, potatoes and wheat. Food inflation, as measured by the WPI, stood at 6.6% in the previous week. It was recorded at 10.78% in the corresponding period last year. This is the lowest rate of food inflation since the week ended 23 February 2008, when it stood at 4.28%.
“Both inflation and inflation expectations are currently above the comfort level of the Reserve Bank. However, reassuringly, inflationary pressures are expected to abate in the coming months despite high crude oil prices and rupee depreciation. The growth deceleration is contributing to a decline in inflation momentum, which is also being helped by softening food inflation,” the RBI said in the statement.


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