India Insight

RBI plays wait-and-watch game as politics dominates

September 17, 2012

Not surprisingly, the Reserve Bank of India (RBI) kept the repo rate on hold on Monday, just days after the Congress-led government dropped a cluster bomb of several reform measures on “big bang Friday”.

Though most experts thought that the RBI would not cut rates on Monday, markets were hoping that central bank governor Duvvuri Subbarao would oblige them just a little bit. The Sensex ended 78 points higher, but was up 200 points in anticipation.

Considering the state of the Indian economy and governance, the reforms did not merit immediate rate action. Market and economy watchers should be patient and wait for FDI — “foreign direct investment” — approvals to go through.

Perhaps Subbarao was watching the political game instead of succumbing to the excitement of the moment.

Mamata Banerjee, a key ally of the ruling Congress party, has given a 72-hour deadline to repeal the FDI changes and the diesel price rise, and reports say she might ask her ministers to resign. The main opposition Bharatiya Janata Party, also against FDI in shopping centres, supermarkets and other retail centres has joined other parties in calling for a nationwide strike on Sept. 20.

No matter how negative a signal it might send, the government might yet cancel what it started. And of course, Subbarao would not want to roll back interest rates if it forces the government back into the position from which it started its attempts to fix the economy.

The main headache for the RBI governor is inflation, still hovering around 7.5 percent. The U.S. Fed’s economic stimulus program, known as QE3, or quantitative easing, can further increase inflationary pressures.

Though the RBI did not give the markets another reason to rejoice, the central bank seems happy with the government’s initiatives.

For now, Subbarao will have to wait for the initiatives to show concrete results.

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