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A Simpler Version of the RBI Statement


There is no RBI Rate Cut. There is no CRR cut. The RBI, in its mid-quarter review of monetary policy, decided that the situation warranted no change in any of the rates. I was partly there; I expected no CRR cut, and either a zero or 50 bps rate cut, even if there was no case for a rate cut.

The stock markets have taken it badly with bank stocks down 3%. The recent surge in bank stocks has been on the hope, no, strong belief that RBI has to cut rates. Even I thought RBI would cave, and it turned out they didn’t.

The review statement is brilliant, but longer than necessary, perhaps. In simple terms:

  • Growth is bad, but inflation is horrible.
  • We did 50 bps in April, no?
  • It was the government’s ball. They had to fix the supply side issues. Encourage investment. We did our 50 bps. They did nothing.
  • Look, bank lending rates are lower than 2003-08. (This is true, but transmission has improved since then too)
  • Western central banks will do a QE the minute there is a big shock. That will increase oil prices, our biggest import, and thus add to inflation. (The first time I’ve seen a categorical statement showing the leak in a QE into commodity prices)
  • If you don’t pass on crude oil price into diesel prices, you don’t get to see higher prices reducing demand and thus lowering prices.
  • And because you subsidize diesel, you borrow the heck out of the market and leave too little for others to borrow.
  • In effect, no rate cuts for now. If there’s a big event, we’ll react, but at this point inflation looks resolute and we have to keep rates to match.

There’s an export refinance system, where the RBI will give money to banks against their lending against exports. Currently they can refinance 15% of their export lending, but RBI has, in this mid-term review, raised the refinance limit to 50%. 30,000 crores will be added to the system in this way – an effective "easing" of about 0.5% of total bank assets. In effect money will go to finance exports which will bring in dollars. But we’ll have to see which banks benefit, and the effect will be uneven.


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