As was largely expected, the Reserve Bank of India (RBI) made no changes in the policy rate in its latest monetary policy review, but clearly outlined its strategy for managing the competing objectives of containing inflation, while infusing the growth momentum back into the economy. The central bank indicated it expected to lower policy rates, with growth concerns increasingly taking centre stage in its assessment of risks. However, it has clearly linked the timing of the cuts to sustained moderation in future inflationary trends, including those relating to fiscal slippage. At the same time, by announcing a 50-basis point cut in the cash reserve ratio, the central bank also seems to have acknowledged that the current liquidity situation within the system was tighter than what it would be comfortable with.
Further, with the escalating government revenue expenditure becoming an increasing source of concern, RBI has stated it would be constrained from providing policy rate relief in the absence of credible steps towards fiscal consolidation. The central bank also pointed to the critical need for policy actions to alleviate supply bottlenecks that are inhibiting investment in the food and infrastructure sectors. Without these administrative initiatives, a relaxation in policy rates would result in a resurgence of inflationary pressures in the short order.
The policy measures and accompanying statements represent another step in RBI’s efforts to reassure markets that recognising the headwinds impacting economic growth on account of lower external demand and slowing investment spending, it intends to ease policy rates once inflationary pressures ease.
Stuart Davis
CEO, HSBC India