Finance Ministry hails RBI's decision to keep rate unchanged

Describing RBI’s decision to maintain status quo as “bold and brilliant”, Finance Ministry on Wednesday said rate cut in times of global uncertainty would have prompted overseas investors to withdraw their investments.

“Perhaps there is uncertainty about US Fed rate decision which is due shortly. So keeping the uncertainty in the international sector in mind...with some kind of resistance to downward pressure on inflation, RBI has taken a decision to take a pause and adopt wait and watch policy,” Economic Affairs Secretary Shaktikanta Das said.

In its fifth bi-monthly monetary policy review RBI on Wednesday kept benchmark interest rate unchanged at 6.25 per cent

“It is a bold and brilliant call by the Reserve Bank of India. Bold, because it is contrary to what people expected,” Chief Economic Adviser Arvind Subramanian said.

“If they had cut rates, then it would have been more attractive for investors to leave the rupee and invest in other currencies. So, that is also a very important fact.

“Because these are uncertain times, because of domestic environments they also had to take into account that whether these liquidity flows into the banking system are going to be temporary or permanent. And so, it is worth waiting for a month or two, when we know what happens, to take a more considered medium term call,” he said.

On the downward revision of Gross Value Added from 7.6 per cent to 7.1 per cent, Das said, the decline in GDP has been projected much more by several other quarters and the RBI projection counters that.

As far as Finance Ministry is concerned, he said, “it is a bit early in the day to take a call. we will analyse the number and take a view.”

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The Finance Ministry is still in the process of making its assessment, Subramanian said, adding, “because, there is a lot of anecdotal evidence that’s going on, with mixed signals coming and we still don’t have a good macro read so we will look at the data as it comes”.

On full transmission of rate cuts so far, Das said, expectation is that banks will lower the rates.

“In fact, in the last 2-3 days, banks have cut interest rate. Against 175 basis points repo rate reduction by RBI from January 2015, banks have passed on 110 basis points to new borrowers and so far as existing loans are concerned it is lower than that,” he said.