As the Indian economy appears to be tipping towards a further slowdown, RBI was left with no option but to come out with a supportive monetary policy that could help sustain domestic demand and bolster confidence in the economy. By reducing the policy rates by 50 bps and doubling the borrowing limit of banks from the current level of 1.0 per cent, RBI has sent a strong signal of monetary easing in order to support growth.
At the same time, it has given a cautious guidance on inflation, against an impending fuel price increase, sticky protein-based inflation and a downward bias in currency. The RBI’s future guidance clearly says persistence of upside risks to inflation inherently limit the space for further reduction in policy rates. This means, the central bank has made best possible use of the available opportune time to kick-start growth.
RBI’s outlook on growth (7.3 per cent in 2012-13) and inflation (6.5 per cent for Mar, 2013) is positive and encouraging. Based on the analysis of leading indicators, the Central bank does see a turnaround in industrial output growth during 2012-13. At the same time, in its opinion, a growth of 7.3 per cent in 2012-13 is closer to the post-crisis trend growth, which means, it does not see much room for further policy easing without aggravating inflation risks.
The indicative growth targets for M3, aggregate deposits and non-food credit growth at 15 per cent, 16 per cent and 17 per cent, respectively, indicate a pretty clear picture of banking sector stability in 2012-13.
Apart from the rate cut, a doubling of the borrowing limit for the banks and allowing an access to this window even to banks holding government bonds over and above the statutory limits is a significant move to ease domestic liquidity conditions.
Another prudent regulatory move on the part of RBI has been to further tighten the norms on banks’ lending to gold loan companies by cutting their exposure limits to such NBFCs. This step was necessary given the rapid pace of the business growth of such NBFCs and the inherent concentration risk in their business model.
To conclude, the Monetary Policy for 2012-13 has delivered bold policy actions warranted by the challenging economic environment.
M D Mallya
CMD, Bank of Baroda
