As the Reserve Bank of India (RBI) continues to balance growth and inflation in this volatile environment globally, Governor Subbarao should be commended for shifting in favour of growth as inflation has been contained in the last quarter. On our part, we expect inflation to come off to 7 per cent levels in the March quarter from 7.5 per cent in December. We welcome the timely CRR cut and RBI guidance to tilt in favour of growth given the contained inflation.
RBI OMO has already pulled the 10-year yield below 8.5 per cent. In the coming months, we can expect RBI to cut policy rates from March. The much awaited CRR cut will help to address the current structural liquidity issue created by the FX intervention earlier this month. Releasing Rs 320 lakh crore into the system will also help all banks to better manage their liquidity, as well as reduce their interest costs.
A turn of the rate cycle should be positive for India in many ways, as once liquidity eases, it will provide encouragement to companies to once again revisit capital investment and undertake growth discussions. Finally, we also commend the RBI for stabilising the rupee at a time of so many global uncertainties.
Given that India has underperformed in 2011, a turn of the rupee could help attract fresh equity inflows. The worst should be over for the current account deficit if oil settles at $112/bbl levels as our global commodities team expects.
Kaku Nakhate
President & Country Head, Bank of America
