‘The guidance for the October monetary policy is clear. There is enough liquidity in the system to meet the demand from the government and private borrowers, good growth momentum, good flow of offshore liquidity through debt and capital markets, and rock-solid stability in money markets, despite the fiscal deficit. Markets have fared well since the July policy, with a decent rally in the stock market, appreciation of the rupee and stable bond yields.
The concern was on inflationary pressures triggered by increase in domestic demand, higher crude oil prices, increased money supply and signs of recovery in global economies that generated offshore demand for India’s goods and services.
There was a clear case of demand build-up and cost-push. The risk of inflation overshooting the target of 6.0-6.5 per cent clearly exists and hence the guidance from RBI for reversal of accommodative monetary policies ahead of the rest of the world. The guidance from the government, however, is to continue with the accommodative fiscal/monetary measures and maintain stability in liquidity (and rates) till the external situation improves, to provide momentum to growth (back in the range of 8-9 per cent).
RBI honoured the market sentiments (and needs of stakeholders in the economy) by keeping policy rates unchanged to maintain price stability till the growth trajectory is firmly in place. The 1 per cent increase in SLR, instead of HTM, maintaining SLR on a par with HTM, is a prudent stand (to remove the subsidy intent of allowing banks to hold statutory investments more than requirement without the need to provide for the mark-to-market impact).
RBI has unwound the special refinance facility extended to NBFCs, mutual funds and exporters. It makes sense to shut the window not used by banks, but the take-away is the comfort on liquidity, with no risk of call rate moving above the repo rate to trigger access to the refinance window.
However, the signals on the way forward are hawkish, with an upward bias on inflation and growth and downward bias in money supply, etc, which are clear signals of reversal of the accommodative monetary policy sooner than later.
