The announcement by the Reserve Bank of India (RBI) Governor of a 50-basis-point reduction in the repo rate is a very timely and welcome move. The monetary policy recognises that it is imperative at this time to take measures that support growth. Financial year 2012 has witnessed a decline in India’s growth rate. At the same time, inflation has moderated due to the cumulative impact of monetary policy actions taken over the last two years and the headline inflation numbers for March 2012, at 6.9 per cent, have come in close to RBI’s projection of 7.0 per cent. Corporate performance has weakened due to higher input costs, higher borrowing costs, and adverse currency movement leading to lower profit margins. The need of the hour is for policy measures that give a fillip to growth and improve sentiment among businesses and households. In this context, the 50-basis-point reduction in the repo rate is a very timely move.
The rate cut is a substantial and meaningful measure and is further accompanied by an increase in the Marginal Standing Facility to provide additional liquidity cushion to banks. The banking system has already witnessed significant improvement in systemic liquidity in recent weeks. In addition, RBI has also stated it would address any liquidity tightness which arises in a proactive and appropriate manner. This liquidity scenario coupled with the rate cut should give banks the confidence to bring down wholesale deposit rates, which in turn would reflect in a reduction in lending rates. This would ease the interest costs of the corporate sector and facilitate new investments, as also give a boost to retail demand.
As always, RBI has comprehensively articulated its view on the range of variables, both global and domestic. The global scenario remains uncertain, with recovery in the US but continuing weakness in Europe.
On the domestic front, the progress on the path of fiscal consolidation outlined in the budget as well as measures to address supply side constraints over the medium term would have to be watched. RBI has also mentioned that given the expected level of economic growth this year, there would not be much room for further monetary easing without aggravating inflation risks. Having said that, the monetary policy stance articulated today would certainly create a conducive environment for a revival in the growth momentum towards the 7.3% level indicated by RBI in its policy statement.
Chanda Kochhar
MD & CEO, ICICI Bank
