RBI wants to moderate inflation, but opts for small hike in key rates.
The Reserve Bank of India (RBI), by its own admission, will prefer to take several baby steps towards normalisation as it is a better way for the economy to reach the pre-crisis growth level.
“We believe we must cross the rivers by filling stones. We have made our internal projections about liquidity, inflation and growth for the next six months,” RBI Governor D Subbarao said at a post-policy press meet.
Though the 25-basis-point hike in repo and reverse repo rates was less than market expectations, a rate hike could be imminent in the future. Many economists and analysts felt there could be another hike 50-basis-point hike before the next policy statement, especially if the inflation rate breached RBI’s tolerance level.
“I will not rule out a mid-cycle action, because we do not know how the situation will evolve. But that is not something we will do lightly. We will think many times before taking any mid-cycle action,” said Subbarao.
Jahangir Aziz, India chief economist, JP Morgan Chase, said if RBI saw the balance of risks to be almost all on the upside, a “calibrating” policy surely should imply a more aggressive stance.
In addition to addressing the classical growth-inflation trade-off, the governor was also mindful of providing a smooth passage to the government’s borrowing programme in the first half of the financial year. As a result, the cash reserve ratio (CRR) was increased by only 25 basis points, which would suck out only Rs 12,500 crore from a system that had an excess liquidity of around Rs 50,000 crore till last week. On Tuesday, the surplus liquidity in system stood at Rs 15, 775 crore.
The central bank's concerns on inflation stems mainly from three sources – lack of clarity about a good monsoon in 2010-11, volatile crude oil prices and build-up of demand pressures.
| AIMING HIGH Growth figures for FY10 and RBI projections for FY11 | ||
| FY10 | FY11 | |
| GDP growth | 7.2* | 8.0 |
| WPI inflation | 9.9 | 5.5 |
| M3 growth | 16.8 | 17.0 |
| Credit growth | 16.9 | 20.0 |
| Deposit growth | 17.0 | 18.0 |
| * Advance estimate by CSO (in %) | ||
Many economists, however, felt that RBI was of the view that the inflation rate might come down significantly in the second half of the financial year. So, there was no need to be overly worried, they said. RBI has projected the wholesale price index-based inflation at 5.5 per cent for March 2011.
On the growth front, RBI projects 8 per cent GDP growth, with an upward bias. This was based on assumptions of a normal monsoon and sustenance of good performance by industrial and services sectors on the back of rising domestic and external demand.
“RBI is optimistic about growth, but it does want to appear complacent. We are yet to see a sustained improvement in private consumption demand, and investment demand is just starting to pick up,” said Samiran Chakraborty, head of India research, Standard Chartered Bank. According to him, with question marks over global recovery remaining, the central bank was justifiably more conservative than the finance ministry in its GDP growth forecast.
Tuesday’s monetary policy stance and measures announced bear the theme adopted in the Second Quarter Review of Monetary Policy – from ‘managing crisis to managing recovery’. While shifting the balance, with near double-digit inflation, the central bank aims to ensure the shift comes with minimal disruption.
