As widely expected, the Monetary Policy Committee of the RBI did not change the basic lending rate. The repo rate, or the interest rate at which the central bank lends money to banks, remains unchanged at 6.5 per cent. No change was expected either, though some people had begun to hope for a small, 25 basis point cut, arguing that both inflation and the rupee were now under control with the global crude prices dropping by nearly 30 per cent from the highs of earlier this year. Besides, after the recent open spat between the government and the central bank over its tight money policy, especially the neglect of the micro, small and medium industries, a small cut was widely expected.
It would have pleased some nominated members of the RBI Board itself, notably, S Gurumurthy, the Swadeshi Jagran Manch ideologue. But the MPC made its own decisions on independent inputs, unmindful of the recent skirmishes between the central bank and the political nominees on its board. Calibrated tightening, a phrase used by RBI Governor Urjit Patel, was the MPC’s stance. It meant that the bank would watch the behaviour of global crude markets and domestic inflation before embracing a more relaxed stand. There was no easing of liquidity either, with the bank maintaining the same cash reserve ratio. A half-a-per cent cut would have freed over Rs 60,000 crores for the banks to disburse to bona-fide borrowers. The central bank, clearly, was unimpressed by the incessant talk of a cash crunch and paucity of funds with the micro, small and medium sector entrepreneurs. Unless, of course, a new window is under consideration for serving the credit needs of this segment of businesses which, though in the informal sector, still employ a large section of the working population. Interestingly, the bank has left the basic rate unchanged while projecting a lower inflation, which was expected to fall further from 3.3 per cent in October to below three per cent by the year-end.
Maybe the factor that kept it from revising the repo rate was the uncertainty in global crude market, given that prices have yet again begun to creep up after the thaw in the US-China trade war and the on-going effort to stop the multistate armed hostilities in Yemen. Curiously, despite the GDP growth falling to 7.1 per cent in the second quarter of the current financial year, RBI has stuck to its forecast of 7.4 per cent for the whole year. Undoubtedly, the investment climate has improved, the rupee has recouped much of its recent losses, GST has been made glitch-free, notebandi is now an old story, but still empirical evidence abounds about employment-intensive sectors far from recovering their old growth rates. Following the management-made crisis in the ILFS, the entire real estate sector has taken another hit. One of the most attractive instruments of big-time builders to sell space in commercial towers at handsome assured returns has been blunted. Developers do not have the capacity to service their commitment of assured returns due to the paucity of funds triggered by the ILFS heist. Since the sector accounts for a large chunk of the unskilled labour, and is a big consumer of steel and cement, its continuing slowdown is worrying. Agriculture is the biggest labour-intensive sector, accounting for more than half of the working population. It too continues to be sluggish. The point is that a 7-plus point growth under the circumstances seems rather optimistic, especially when things are far from rosy in the export sector as well. The response of the markets to the monetary policy reflected the popular stance. Which is neither here, nor there. Both the Sensex and the Nifty ended lower, but this indicated no panic but a stoic acceptance of what was factored in already.