Rajiv Bhuva
For the second consecutive monetary policy review, the Reserve Bank of India (RBI) has
left the repo rate unchanged at 8.5 per cent. Thus, today's (Tuesday) review reinforces the feeling engendered in October that the central bank was ready to take a pause in its
fight against inflation. And that it was ready to dilute its reputation as one of the most hawkish central banks, a reputation earned by increasing rates 13 times between March 2010 and October last year.
But there is something more in today's announcement. The cash reserve ratio, which determines the amount of cash the banks must keep, has been cut to 5.5 per cent from 6 per cent. This will release Rs 32,000 crore into the banking system, making it available for lending.
And the good news does not end there. "The reduction (in CRR) can also be viewed as a reinforcement of the guidance that future rate actions will be towards lowering them," says RBI, warming the hearts of those - many of them top government functionaries -who have been demanding a softer rate regime.
But don't get your hopes up just yet.
In his first three years at Mint Road in Mumbai,
RBI Governor Duvvuri Subbarao had his hands full. He oversaw a series of interest rate cuts while combating crisis after the Lehman Brothers collapsed in September 2008 and the global financial meltdown set in. Subsequently, Subbarao turned the tide of accommodative monetary policy by raising rates to tame inflation.
Beginning February 2010, Subbarao tightened the monetary policy significantly with an effective increase of 525 basis points (a hundred basis points make a percentage point) in policy (repo and reverse repo rates) and a 100 basis points increase in CRR.
Subbarao's second stint, which began with a two-year extension in August last year, is turning out to be no less eventful. The gross domestic product (GDP) growth has fallen from 7.7 per cent in the April-June quarter of 2011-12 to 6.9 per cent in July-September. Headline inflation, measured by the wholesale price index, which averaged 9.7 per cent during April-October 2011, fell to 9.1 per cent in November and to 7.5 per cent in December.
The fall in inflation, RBI's avowed enemy number one, was a reason for many to believe that today would mark the beginning of an accommodative journey with a rate cut. But, RBI had something else in mind. It is dangling the CRR cut as a big thing. Which it appears to be on paper. At a time when growth is slipping, the extra Rs 32,000 crore made available for lending can make some difference to capital infusion plans by industry. However, the freed-up cash is unlikely to find its way into increased non-food credit, the growth of which has slowed down.
RBI attributes some of the slowdown in credit growth to monetary tightening, but the deceleration below 18 per cent is more than expected. Apart from the slowdown in economic activity, RBI views the lagging credit growth as a reflection of increased risk aversion by banks due to an increase in their non-performing assets.
In this scenario, RBI's statement that today's review portends a lowering of rates can be taken to the proverbial silver lining. But that hope, too, is short-lived.
The spoiler lies in today's document itself. "Based on the current inflation trajectory, including consideration of suppressed inflation, it is premature to begin reducing the policy rate," says the document. "The reduction in the policy rate will be conditioned by signs of sustainable moderation in inflation."
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