By S Sethuraman
The Reserve Bank of India has delivered a more than anticipated half a percentage point cut in the key policy lending rate (repo) from 8.5 to 8 per cent with immediate effect, to the great relief of industry and more so, of a Government in distress, in an environment of slowing growth and negative perceptions over its budget without reforms, policy slippages and governance.
RBI makes it clear that it is not as yet set on a path of steady rate reduction. “The reduction in the repo rate is based on an assessment of growth having slowed below its post-crisis trend rate which, in turn, is contributing to a moderation in core inflation. However, it must be emphasised that the deviation of growth from its trend is modest. At the same time, upside risks to inflation persist. These considerations inherently limit the space for further reduction in policy rates”, RBI said on April 17 in its Monetary Policy Statement for 2012-13.
Still, a hefty 50 basis point cut was least expected even by corporates which had hoped for at best a 25 basis point cut in repo rates. The Policy Statement by Governor Dr D. Subbarao has readjusted the repo to 7 per cent and the Marginal Standing Facility (MSF) to 9 per cent while raising the borrowing limit of scheduled commercial banks under MSF from 1 per cent to 2 per cent of their net demand and time liabilities (NDTL) outstanding at the end of second preceding fortnight with immediate effect. The Bank Rate has also been readjusted to 9 per cent.
The cash reserve ratio (CRR) of scheduled banks has been retained at 4.75 per cent of their NDTL, as liquidity, conditions “are steadily moving towards the comfort zone of the Reserve Bank, as reflected in the decline in banks’ borrowings from the LAF and the behaviour of money market rates”, according to the Statement. The increase in the MSF limit would provide additional liquidity comfort but if the situation should change, “appropriate and proactive steps will be taken with the objective of restoring comfort zone conditions”.
According to RBI, the policy actions in the Statement are expected to stabilise growth around its current post-crisis trend, contain risks of inflation and inflation expectations re-surging, and enhance the liquidity cushion available to the system.
For 2012-13, RBI’s baseline projections are for GDP at 7.3 per cent (lower than the budgeted 7.6 per cent with plus or minus quarter per cent). Earlier IMF/World Bank estimates were 7 and 7.5 per cent respectively. On Inflation, RBI has projected 6.5 per cent at the end of March 2013. Money supply growth is assumed at 15 per cent with deposits growing at 16 per cent and non-food credit at 17 per cent “keeping in view the resource requirements of private and public sectors”.
On the state of economy, “a matter of growing concern”, warranting calibrated monetary response, RBI statement said though inflation has moderated in recent months, “it remains sticky and above the tolerance level, even as growth has slowed. Significantly, these trends are occurring in a situation in which concerns over the fiscal deficit, the current account deficit and deteriorating asset quality loom large. In this context, the challenge for monetary policy is to maintain its vigil on controlling inflation while being sensitive to risks to growth and other vulnerabilities”.
The Governor has said that the Monetary Policy statement should be read and understood together with RBI’s detailed review in Macroeconomic and Monetary Developments released a day before. Externally, the euro area sovereign debt problem will continue to weigh on the global economy. “Growth risks have emerged in emerging and developing economies (EDEs). And, amidst all these, crude oil prices have risen by about 10 per cent since January and show signs of persisting at current levels.”
The Review overall presents a gloomy picture of the economy with the industrial sluggishness, twin deficits, falling rupee, accentuating balance of payments risks and decline in savings and investment rates.
It elaborates the actions needed by Government on several fronts, especially fiscal and addressing supply constraints in agriculture, energy and transport sectors. Growth had declined to 6.9 per cent in 2011-12.
Going forward into 2012-13, according to the new Policy Statement, on the assumption of a normal monsoon RBI expects agricultural growth to stay close to the trend level and industry to perform better than in last year as leading indicators suggest a turnaround in IIP (Index of Industrial Production) growth.. “The global outlook also looks slightly better than expected earlier. Overall, the domestic growth outlook for 2012-13 looks a little better than in 2011-12. Accordingly, the baseline GDP growth for 2012-13 is projected at 7.3 per cent”.
After two years of policy tightening to counter elevated inflation and anchor inflation expectations by 375 points, raising repo rate to 8.5 per cent between March 2010 and October 2011, the Reserve Bank paused in its mid-quarter review (MQR) of December 2011 and indicated no further tightening was required and that future actions would be towards lowering the rates.
Two considerations guiding the new policy stance, according to RBI, are growth decelerating significantly to 6.1 per cent in Q3 of 2011-12 (though it was expected to recover modestly in Q4) and economy assessed to be operating below its post-crisis trend and secondly, headline WPI inflation as well as non-food manufactured products inflation moderating significantly by March 2012.
Inflation softening was also driven by moderation in the core components reflecting a slowdown in demand. “Against this backdrop, the stance of monetary policy for 2012/13 is intended to adjust policy rates to levels consistent with the current growth moderation, guard against risks of demand-led inflationary pressures re-emerging and provide a greater liquidity cushion to the financial system, RBI Policy Statement said.
For the moment, growth has taken precedence over inflation still close to 7 per cent and above the comfort zone for RBI. WPI in March was 6.89 per cent but both primary articles, especially food articles, remained close to 10 per cent and all food indices were up over the month. But what must have influenced Dr Subbarao, after his meeting with the Prime Minister besides the Finance Minister, is the stagnation in industrial output with the continuous tightening being cited as a major factor. (IPA Service)
