The critical agenda with Reserve Bank of India now is to maintain adequacy and cost of liquidity in such a manner that market (and monetary) dynamics stay as catalysts to growth momentum without inflaming inflationary pressures. The focus on growth gains priority, while the government struggles to address issues concerning fiscal and trade deficit with limited ability to address the issues from the cost side.
The central bank has done its best to address adequacy of liquidity through aggressive 125 basis points cash reserve ratio cut since end-January 2012. It is expected that deficit system liquidity will be around one per cent of net and demand time liabilities on shift into 2012-13. The concern now is in addressing the elevated cost of liquidity with a money market rate curve above banks’ base rate across one to 12 month tenor.
Given this condition, banks have little room to cut their lending rates. The expectation of downtrend in growth and inflation in 2012-13 builds a need for shift into growth supportive monetary stance. The shift from anti-inflation to a balanced one has not made significant impact on liquidity and cost of liquidity. The risks to inflation from external sector (high crude oil price) and exchange rate (weak rupee) stay diluted. It is time to shift to growth supportive monetary stance. Hence the unanimous expectation for shift into rate reversal mode latest by April annual review. Against this backdrop, RBI chose to leave policy rates unchanged awaiting more clarity on downtrend in inflation and fiscal deficit number from Budget 2012-13.
The government’s ability to manage fiscal deficit at the cost of populist measures will need to reflect in the annual budget. The RBI’s stance has sent post-policy weakness into the market pushing stock and bond markets down despite delivering to market consensus.
Romesh Sobti
MD & CEO,
IndusInd Bank