The Reserve Bank of India (RBI) has balanced its signals through the two significant portions of the credit policy announced today — the unchanged repo rate and the moderate cash reserve ratio (CRR) cut of 0.25 per cent. These reflect a continued concern over high inflation and resonance with the recently announced spate of reforms.
The CRR cut might not cause a flutter in lending rates, although an estimated Rs 17,000 crore might be released into the primary credit system. It might, however, enable banks to expand their credit portfolio.
RBI seems very cautious and hawkish on inflation and rightly so. Asset prices are susceptible to upside risks because of monetary policy easing in Europe and the US.
The US drought and the moderate Indian monsoon could cause commodity prices to move up. An inefficient food storage and distribution mechanism in India add to the woes.
The future continues to be uncertain, with far too many variables - exchange rates, crude oil prices, crop levels, and foreign institutional investor inflows — to influence the current account deficit and inflation. RBI is, therefore, likely to keep watching and ease monetary policies only when inflation comes down, may be to six per cent.
One should not expect miracles from RBI, at least not on its own! That will not be fair to the institution which has ring-fenced the Indian economy amidst the global chaos over the past few years. Monetary policies have their limitations — structural steps are needed to improve the supply of goods and services. It is, therefore essential, that the monetary and non-monetary policies move in tandem.
Milind Sarwate
Group CEO, Marico Ltd