Managing inflation has been a key priority for the Reserve Bank of India (RBI) and accordingly, policy rates were raised 13 times since March 2010. This helped keep the financial system in a cash-deficit mode and make the repo rate effective. We have seen a dip in food inflation, but manufacturing inflation continues to be stubborn. At the same time, we have witnessed concern over an economic slowdown and there was a waning of confidence in economic growth. RBI, in its annual monetary policy in May, had projected eight per cent growth for India’s gross domestic product in 2011-12; this was cut to 7.6 per cent in October.
Given the situation, RBI needed to do a fine balancing act between curbing inflation and reviving the sentiment. Today’s cut in the cash reserve ratio (CRR) by 50 basis points would reduce the cash deficit to some extent, and act as a liquidity-enhancement measure, mitigating the downside risk to growth. However, more than easing liquidity, I view it as a positive signal for the industry and, hence, it is a welcome move.
However, today’s CRR cut, by itself, would not have a large impact on investment coming back, but it will set the ball rolling. One has to look at the overall picture and see if the economy is going to turn around. This would be a combination of the measures, which will be taken in the upcoming Budget and policy announcements that are expected to follow in March and April.
Pawan Goenka
President (automotive and farm equipment sector),Mahindra and Mahindra