Almost three years have elapsed since India went through a phase of intense financial volatility. At that time, India was faced with a serious currency crisis, high inflation and negative real rates as well as an uncertain trajectory for the banking system as a whole. Three years down the line, the picture has changed dramatically.
Real rates are now firmly in the positive territory, inflation levels are within target, the rupee has stabilised considerably and a credible roadmap is in place for addressing the concerns of the banking sector. India is also gaining traction as a credible inflation targeting economy.
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The government's commitment to this stabilization has also been evidenced in its decision to adhere to the fiscal consolidation roadmap in the FY17 Budget and in its active efforts to support the downward trajectory of inflation.
These developments have given the RBI governor comfort to turn his attentions to the more pressing growth concerns, which he has done with renewed focus. The 25 bps cut was on expected lines and combined with significant announcements on the liquidity, markets and regulatory front, the stage has been set for a decisive shift in the landscape of the Indian financial sector.
Firstly, RBI's commentary on liquidity was much warranted given the stressed liquidity situation being witnessed, which was not allowing RBI's rate actions to fully pass through. The decisive commitment for providing liquidity will help in aligning the signals from level of systemic liquidity with the accommodative stance of the RBI. This will significantly aid in transmission of the policy stance.
Secondly, RBI announced its inflation forecast at 'around 5 per cent' during FY17, which will help it to stay accommodative. However, the central bank noted upside risks from implementation of the 7th Pay Commission, uncertainties from monsoon, and trajectory of commodity prices. These will be the key variables to watch out for going ahead.
Thirdly, far reaching changes have been initiated in the structure of the banking system and the way financial markets operate in our country. These measures will help deepen various sectors and asset markets, promote greater transparency and increase the efficiency of their functioning.
On balance, the domestic backdrop is supported by a stable currency and a stable low inflation regime, supplemented by deflationary trends being witnessed globally. Consequently, we see RBI maintaining an accommodative stance going ahead, which will be growth-supportive, provided inflation trajectory evolves as expected.
Shilpa Kumar
Sr general manager and head- global markets group, ICICI Bank
Sr general manager and head- global markets group, ICICI Bank
