Tarun Kataria
In its third quarter review of the monetary policy, the RBI has kept the Bank rate, reverse repo, repo and CRR unchanged, belying expectations of a 25 bp cut in repo rate in line with the recent rate cuts by the US Fed and other central banks.
The RBI effectively has indicated its inclination to manage inflation closely while keeping an eye on growth, with further action on the rate cuts depending on clear signs of a slowdown, if any, while staying firmly on the course that it had charted for itself in the mid-term review.
Tracking inflation
The RBI has set an inflation target at 5 per cent while keeping the growth forecast unchanged at 8.5 per cent. Most certainly, it will closely track inflation, which appears to be fuelled by higher energy and food prices and an increase in money supply owing to large foreign currency inflows.
While the growth outlook for the industrial and agricultural sectors remained positive, the outlook for the services sector remained susceptible to global developments. Clearly, the central bank wants to mitigate any external/liquidity pressures in employment-intensive industries and has exhorted banks to increase credit delivery to these sectors.
Coupled with the need to anchor inflationary expectations and in line with containing money supply growth at 17-17.5 per cent (currently at 22 per cent) as stated in the annual policy, it is quite likely that the central bank will resort to liquidity sterilisation measures.
One can expect sector-specific regulatory changes in the near future in the light of the stated concerns of the central bank on huge foreign currency inflows, the associated liquidity overhang and asset inflation fears. The central bank would want to see a more stable form of inflows and would have a stated preference for the same in any regulatory changes that might be announced.
Reposing faith in The economy
Through this policy, the central bank has clearly demonstrated its faith in the Indian economy’s growth potential and ability to bear the brunt of a global slowdown. As of now, it appears to be a period of wait-and-watch for further developments. Growth versus inflation expectations will determine the future course of action — but for now, the central bank is keeping its options open.
The author is Managing Director and Head, Global Banking and Markets, HSBC India.
