The Reserve Bank of India’s (RBI’s) mid-quarter policy review has finely balanced the requirements of inflation management with growth considerations.
Its decision to keep policy rates unchanged has been along market expectations, as headline (wholesale price index) inflation stays sticky around 6.5 per cent, retail (consumer price index) inflation remains close to the double-digit level and core inflation keeps hardening. More, inflationary expectations are riding high on account of weaknesses in the kharif crop, rationalisation of domestic fuel prices and quantitative easing in developed nations. Going forward, RBI would keenly observe how inflationary risks play out and to what extent government measures succeed in controlling the fiscal deficit before changing the monetary policy stance.
At the same time, RBI does not want growth to suffer due to inadequate accommodation of the credit requirements of productive sectors. While liquidity conditions have remained comfortable so far, it expects the gap between deposit and credit growth to widen further, on the back of the seasonal pick-up in credit demand during the second half of 2012-13. This, combined with advance tax payment outflows and increased cash balances in the hands of the public due to the onset of the festive season, has prompted RBI to reduce the Cash Reserve Ratio by 25 basis points. This, in turn, will inject primary liquidity to the extent of Rs 17,000 crore into the banking system.
RBI’s move today has complemented the government’s recent measures to improve fiscal consolidation and attract more of capital inflows. On the whole, the concerted policy actions by the government and the central bank are strongly positive for the country’s real sector, financial markets and currency, despite growing uncertainties in the global environment.
M D Mallya
CMD, Bank of Baroda
