When RBI announced the Credit policy yesterday On the basis of an assessment of the current macroeconomic situation, it has been decided to:

1. keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4.75 per cent of their net demand and time liabilities; and
2. keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 8.0 per cent.
Consequently, the reverse repo rate under the LAF will remain unchanged at 7.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 9.0 per cent.

The Indian benchmark Sensex Index was down 1% at pixel time while the Indian rupee lost .6% as the fears over growth overwhelmed any benefit from holding the rates.

In fact the review statement from RBI was brilliant trying to simplified :

  • 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.

The theory: when banks can borrow from RBI cheaply they will lend to customers are lower rates.