The Reserve Bank of India has implemented the first cut in key policy rates in three years, reducing the repo rate by as much as 50 basis points to 8%. The cut, which was much more than the market expectation of 25 bps, was made to boost sagging economic growth. Jinsy Mathew chats with Upasna Bhardwaj, Economist, ING Vysya Bank, on the implications of the move.
Was the policy announcement in-line with your expectation?
The direction was definitely in line with our expectation, as we did expect the Reserve Bank of India (RBI) to be focussed on growth. But I did not expect a sharp 50 basis point (bps) cut today.
So, how do you read this development?
The RBI continues to be straddled by the fact that growth is slowing down and inflation also continues to remain high. At such a juncture, I believe that the central bank has focused on the last quarter inflation numbers.
At the same time, the growth momentum has been easing which has prompted the RBI to act. Meanwhile, it will continue to remain watchful of the inflation trajectory going forward. I do expect another 25-50 bps cut through the year. However, the timing would remain a function of how the inflation pans out.
Would a 25 bps cut and a CRR cut been a practically better option?
My view was of a 25 bps without a CRR cut, because CRR would be directly infusing liquidity into the system. This measure was not needed as of now as the liquidity situation will remain fairly comfortable in the next few months.
Given the Government borrowing and inflation fuelled by oil prices which remains a great danger, do you still consider that the RBI would be in a position to cut rates?
The RBI has been emphasizing on the fact that fiscal situation has been one of the biggest contributor to inflation. Unless that is taken care of, the ability of the monetary policy action is also limited. So in this context, if the Government manages to improve its fiscal stand which is very doubtful under inclusion of subsidy bills etc, there is definitely some scope.
At the same time, with the policy paralysis from the Government side, the only sign where the economy can get a kick-start is through the monetary policy right now. Since inflation remains the key challenge, the apex bank will have to tread cautiously.
There are lot of latent price pressure building up for inflation trajectory to go up. Thus the 6.5% March inflation figure is something I doubt as I estimate it to be around 7.5%. As long as it remains between 7 – 7.5%, the RBI may have some more room to cut rates.
Do you think the statements are not as hawkish as the announcements in the previous reviews?
I would say that the RBI certainly is not as hawkish as the last time. However, they have clearly highlighted the inflation risk throughout the announcement and to top it they have mentioned that ‘the room for further rate cut is limited’.
Everyone was expecting a 25 bps cut today and gradual cuts in the future but RBI frontloaded it to 50 bps. So now they expect the economy to improve (remove this line). So I don’t think we should consider this as a dovish stand.
GDP forecast stands at 7.3% which is lower than the Budget estimate and the PMI. Do you think the RBI is thinking that GDP won’t be ramping up?
My own estimate for GDP for FY13 stands at 7.1%. If we were to see some bold measures from the government, we could see a total reversal in sentiment which can help in seeing the investment activity pickup at a much faster pace. Monetary policy can only act as a catalyst but for the change to come along we need both fiscal and monetary policy complimenting each other.
RBI cutting bank exposure to gold loans at 7.5% as compared to 10% was a sweeping move. Is this a credible step in reining the increasing risk in gold loan industry?
For the last couple of months, the RBI has been actively taking several steps in controlling the exposure that has been increasing tremendously over the last couple of years. The central bank is defiantly taking clear measures so as to curb the systemic risk caused by the high exposure.