The Reserve Bank of India (RBI) is likely to continue with its cautious optimism in the mid-term review of the monetary and credit policy. The undertone could have turned grimmer but for the taming of the oil prices and the impending launch of the quasi-sovereign Millennium India Deposit (MID) scheme have almost changed the sentiment of the foreign exchange market overnight. A semblance of stability has also returned on the interest rate front with bond prices creeping up and corporates slowly taking the debt route.
The balance of payment (BoP) situation, it seems, is the primary concern of the central bank at this juncture. In the first quarter of the current fiscal, the BoP deficit was $1.021 billion and is slated to go up further once the full impact of the record high oil prices is felt. The April-June deficit compares with a $3.32-billion BoP surplus in the last quarter of fiscal 2000 and a $1.46-billion surplus in the first quarter of the last fiscal.
India is unlikely to repeat the four-year sequence of BoP surpluses during the current fiscal. However, the RBI feels exports and invisible receipts from the infotech sector are likely to offset the higher oil import bill to a large extent. Moreover, the MID proceeds will take the forex reserves close to $40 billion -- a size which can always lend comfort and give the central bank a handle to tackle even the worst of crises.
The RBI has already toned down its prediction about the real GDP growth from 6.5-7 per cent as outlined in the April policy document to 6.5 per cent. It has also challenged the Centre's growth projection of 7 per cent. Which, according to the RBI, is not possible until the "real investment growth occurs along with technology improvements and efficiency gains."
Rising interest rates and oil prices, hike in inflation and a bearish capital market may topple the Centre's applecart for growth but the RBI is unlikely to tone down its projection below 6.5 per cent.
On July 21, when the RBI governor Bimal Jalan rolled back his April measures by jacking up the benchmark bank rate and cash reserve ratio (CRR), the market was taken in by surprise. Jalan defended the rollback saying it reflected the RBI's assessment of developments in the domestic and international markets in regard to liquidity as well movements in international interest rates which had hardened over the past one year, while rates back home came down substantially.
The RBI move raises some key questions: Could the scenario change overnight to warrant such a drastic action? Wasn't the RBI aware of it while announcing the quartet of cuts in bank, savings bank deposit, repo rates and CRR about four weeks ahead of the slack season monetary and credit policy?
The fact of the matter is that Jalan had no choice but to play to the tune of finance minister Yashwant Sinha, particularly after his long-standing demand of slashing the public provident fund, government provident fund and other small savings interest rates was accepted by the ministry.
However, the seeds of the rollback were sown in the April credit policy itself. Jalan had made it clear in the policy document: "It cannot be overemphasised that the outlook can change dramatically within a relatively short period of time in the wake of unanticipated domestic or international events. On the inflation front, there is need for continuous vigilance and caution. The Reserve Bank will continue to monitor domestic monetary and external developments and tighten monetary policy through the use of instruments at its disposal, when necessary and unavoidable."
The RBI governor did not lose time in tightening the policy at the first signs of the rupee weakening against the dollar. The hike in bank rate and CRR was followed by other potent measures like cut in banks' refinance facility and liquidation of the 50 per cent outstandings of the exchange earners foreign currency (EEFC) accounts.
Finally, when everyone was speculating about Jalan's next move and his critics virtually started writing the epitaph of his policy measures saying he has exposed his vulnerability to the market and no more weapons were left in his arsenal, came the master stroke: the Millennium India Bond. The net result: the rupee bounced back, bond prices shot up and the general sentiment turned bullish. The taming of oil prices, thanks to the US decision to release oil from its special reserves, served as the right backdrop for bullishness to return.
The RBI is expected to take the story forward in the mid-term review of the monetary and credit policy. As far as monetary measures are concerned, Jalan does not need the policy platform to make announcements. He never fights shy of firing on all cylinders as and when the situation demands even if it means a complete reversal of stance in a short span of three months!
