The monetary policy statement of the Reserve Bank of India (RBI) presented on March 1is significant in several ways. The fact that there was no change in monetary or liquidity measures did not surprise any one.

This is one policy statement whose rationale could be easily understood. As Governor Raghuram Rajan said at the press conference, the only thing surprising about today was the lack of surprise.

The RBI’s inaction did not make it a non-event. Part B of the RBI statement, dealing with developmental and regulatory issues, catalogues activities that are critical for the financial sector. Despite their importance, they were discussed only in the annual and half-yearly policy statements. It is hoped that the RBI will make this a regular feature in all its bi-monthly statements. The next one will be on July 3.

There were some doubts as to whether the RBI could have effected an interest rate cut in this election season. The argument went like this. With the model code already in force, does the RBI have the leeway, for instance, to change the repo rate when the government is prevented from making any policy announcement?

Own conviction

The RBI’s reference to the Election Commission on new bank licences seemed to lend credence to that view. However, while the central bank was playing it safe at that time, it was in no way constrained in cutting the repo rate or the CRR (Cash Reserve Ratio), if it had to. In other words, it was not some external compulsion in the form of Election Commission diktats, but the RBI’s own conviction to maintain the status quo that carried the day.

Even on bank licences, the RBI, having secured the Election Commission’s go ahead, has said that it will not wait until a new government is formed. Indeed, the first two in-principle clearances were given the very next day to IDFC and Bandhan Financial Services Private Limited.

The important message is that the monetary policy document is an economic and regulatory statement, and there is no reason why even in the run up to the polls, it should acquire a political colour.

The rationale for the policy stance is always rooted in the evolving macro-economic situation. Economic growth is poised to go up from below 5 per cent to around 5.5 per cent (in a range of 5 to 6 per cent) in 2014-15. Factors that may pull back GDP growth include unsatisfactory monsoons, uncertainty in the setting up of minimum support prices, and the new government’s approach to macroeconomic problems such as the fiscal deficit.

On the positive side, easing of domestic supply-side bottlenecks and clearance of stalled projects will help pick up activities. The current account deficit has narrowed considerably on the back of sustained forex inflows. Some deft moves, on the part of the government, have helped.

The RBI, which has set the CPI inflation target at 8 per cent for January, 2015, enumerates several upside risks: vegetable prices shooting up again, global commodity prices rising once again due to economic recovery in the advanced economies and so on. But there is an emphatic commitment on keeping the economy on a disinflationary glide path that is intended to hit 8 per cent CPI inflation by January 2015, and to 6 per cent a year later.

It is in this context that the RBI gives a kind of assurance that if inflation decelerates as intended, there will not be any need to tighten monetary policy. Explaining the reasons behind holding rates, it says that past rate increases should be allowed to work through the system.

The Urjit Patel Committee’s report figures prominently in the statement. Its suggestion to reduce liquidity access to overnight repos while making a corresponding increase in term repos has been accepted.

Other recommendations accepted include adoption of CPI as the key measure, explicit recognition of the ‘glide path’ for disinflation and transition to a bi-monthly monetary policy cycle.

For markets, the inflation-indexed bonds are to be made more customer-friendly. Foreign investors will be encouraged to invest more, and for that purpose entry costs will be eased and the risks from volatility will be reduced.

The problem of bad loans looms large over the banking system. The RBI will constantly review the measures put in place, and make necessary adjustments to the policy framework.

It is clear that many of the non-monetary policy measures will figure prominently in the bi-monthly policy statements.

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