PRATIP CHAUDHURI
Chairman,
State Bank of India
Inflation has emerged as a major fault line in India’s economic structure, which is not conducive to the country’s long-term growth prospects. RBI’s stance has, therefore, clearly shifted into an inflation control mode and continuing its path of steady tightening, RBI has increased the policy rates along with measures to streamline the operating procedure of monetary policy.
A major highlight is the change in operating procedure of monetary policy. The weighted average overnight call money rate will be the operating target of monetary policy. The repo rate has been adopted as the single operating rate and, henceforth, only changes in the repo rate will be announced and the reverse repo rate will be automatically worked out at 100 bps below the repo rate. The introduction of the marginal standing facility will allow banks to borrow up to one per cent of their NDTL.
CHANDA KOCHHAR
MD & CEO,
ICICI Bank
Containing inflation and anchoring inflation expectations is clearly the primary focus of the Reserve Bank of India (RBI) in its Monetary Policy Review for 2011-12. Price stability has taken precedence over growth. This is, however, necessary to maintain a sustainable growth momentum in the economy over the medium term. RBI has indicated inflation for March 2012 at 6 per cent, with elevated levels in the first half of the year. The GDP growth has been projected to moderate during 2011-12 to around 8 per cent. The move towards a single independent policy rate, which would be the repo rate, is a welcome step and will improve the transmission mechanism of RBI’s monetary policy stance. In addition, by leaving the cash reserve ratio and the statutory liquidity ratio unchanged, RBI has ensured that liquidity in the system remains in balance and maintained within the prescribed range.
RASHESH SHAH
Chairman,
Edelweiss Capital
RBI’s job is never easy because it is a constant tightrope walk between growth and managing inflation. The last whole year, RBI strove for this delicate balance, but as Governor D Subbarao has pointed out, several developments, including galloping commodity and oil prices, made inflation increasingly difficult to control.
It was important that RBI take a tough stand and it has done just that. There are times when monetary policy should not just attempt to control inflation. By raising interest rates 50 basis points while lowering its growth forecast to about 8 per cent, RBI hopes to contain inflation by reining in demand-side pressures, and anchor inflation expectations. Another welcome move is to reduce complexity by making the repo rate as the only one independently varying policy rate and making the reverse repo rate dependent on the repo rate.
ARUN DUGGAL
Chairman,
Shriram Capital
The Reserve Bank of India’s Monetary Policy Statement for 2011-12, with a 50 basis points increase in the repo rate, gives a clear signal that the central bank is committed to deal with the inflation issue with a firm hand. Inflation has been stubbornly high for over a year despite eight policy interest rate increases by RBI. High commodity prices, particularly of oil, are likely to continue the inflationary pressure in the near term. Under the circumstances, it is entirely appropriate that RBI continues with its proactive monetary policy measures like increase in the repo and reverse repo rates to bring down inflation and inflation expectations.
We must accept that there is no free lunch. These actions are likely to slow down growth in the near term, and we will see a fall in demand of various goods and services. The stock market will also remain subdued in the near term.
KAKU NAKHATE
Country Head (India),
Bank of America-Merrill Lynch
We think RBI Governor Subbarao has done a good job in balancing the challenges of fighting inflation, and at the same time protecting economic growth. Given that inflation will likely average over 8 per cent this year, we clearly need to tighten. After all, higher inflation will only put growth in peril in the future if inflation expectations go up. At the same time, the governor has remained conscious of the downward risks to growth.
We welcome the acceptance of the recommendations of the Deepak Mohanty group which will help to make monetary policy more transparent. Introduction of CDS curve is an important step for the bond market development and as this benchmark gets established will help Indian corporate borrow more efficiently. In fact, a good CDS curve only furthers the confidence of investors to price INR credit efficiently.
KEKI MISTRY
Vice Chairman & CEO,
HDFC
In a bid to clamp on inflation, RBI has deviated from its earlier calibrated stance of increasing the repo and reverse repo rates by 25 basis points each to a more aggressive 50-bps increase. While this was not unexpected and markets had largely factored in the increase, RBI has clearly elucidated the need for inflation to be reined in as quickly as possible.
As a cautious measure, RBI has opted to increase provisioning requirements for non-performing assets of banks. While this may put pressure on banks’ margins, this should be viewed as the regulator’s attempt to strengthen the prudential framework and ensuring that banks have sufficient cushion in case of deteriorating asset quality.
The increase in the savings bank deposit rate to four per cent with immediate effect would, to some extent, protect savers against the persistently high inflation rate.
