Ajay Srinivasan, CEO, Aditya Birla Financial Services says about the RBI policy that, "No doubt, India’s central bank faces multiple macro-economic challenges. Growth has slowed meaningfully, inflation remains sticky and the country faces elevated current account and fiscal deficits. The multiple challenges facing the country are highlighted by the fact that RBI has lowered FY13 GDP growth forecast from 6.5% to 5.8% and increased Mar’13 inflation forecast from 7% to 7.5%. The extent of slowdown is highlighted by the fact that the latest FY13 growth projection is 150bps below the 7.3% growth forecast in April.
"The central bank continues to follow a path of “calibrated easing” in the tough current macro environment by cutting CRR by 25bps and keeping repo rate unchanged at 8%. RBI is essentially trying to navigate the twin problems of slowing growth and sticky inflation using a 2 pronged approach. Firstly, to make sure there is ample liquidity in the system and that productive sectors of the economy are not starved of credit. This explains why RBI has cut CRR rate by 175bps from 6% to 4.25% now in the last 10 months. Secondly, RBI is trying to lower the high inflation and inflationary expectations faced by the country since 2010. The RBI's concerns regarding inflation is evident in its statement that “managing inflation and inflation expectations must remain the primary focus of monetary policy”. This explains the decision to keep repo rate at 8%.
"Going forward, as the impacts of diesel price hike fade and inflation shows signs of moderating, we would expect RBI to be much more focused on targeting our growth slowdown."
