If Reserve Bank of India (RBI) Governor D Subbarao’s initial role was to manage crisis, his role now will be to manage recovery. The governor himself said as much in the monetary policy announced today.
With the domestic economy yet to fully recover from the global knock-on effects, the governor left policy rates or the cash-reserve ratio (CRR) unchanged. Instead, he picked up statutory liquidity ratio (SLR) to signal the start of the end of the accommodative monetary stance. This, as marketmen see, will not hurt sentiment.
Interestingly, it was the SLR that was cut as the first step towards easing the monetary policy in 2008. This was led by Subbarao himself. Another possible roadblock to economic recovery is poor credit growth, which is now at a 12-year low of 10.75 per cent. While this has made RBI lower its loan growth projection to 18 per cent, from 20 per cent projected in June and 25 per cent in April, banks have been urged to “step up efforts towards credit expansion while preserving credit quality.”
Economists expect a hike in the CRR by January. Repo and reverse repo rates may be hiked only in the policy review in April, they say.
“The hike in the SLR is an unexpected move. I expect RBI to raise the CRR in December if inflation spikes. If not, the CRR is likely to be raised in January,” said Abheek Barua, chief economist, HDFC Bank. RBI recently conducted a series of meeting with companies, economists and bankers to gauge their expectation. Industry was almost unanimous regarding continuity of the accommodative regime.
Though Subbarao fulfilled industry’s wish by not touching key rates, he reminded them that the central bank was mindful of its fundamental commitment to price stability. The bank today raised its inflation forecast from 5 per cent to 6.5 per cent, with an upward bias in view of the global trend in commodity prices and the domestic demand-supply balance, while maintaining the growth projection at 6 per cent with an upward bias.
According to Subbarao, India’s dilemma over the timing of exiting the accommodative stance is different from what advanced and other emerging economies are facing as there are no major concerns over rising prices in most economies.
While some advanced economies were facing, deflation concerns, India was confronted with a rising wholesale price index (WPI)-based inflation and a “stubbornly” elevated consumer price index-based inflation, the governor argued in his policy statement today. “It (WPI inflation) has already increased by 5.95 per cent on a financial year basis, though some of the increase is seasonal and is likely to soften. However, the base effect, which resulted in negative WPI inflation during June-August 2009, is now expected to work in the reverse direction, accentuated by high food prices,” RBI said.