In its third bi-monthly policy statement, the Reserve Bank of India did not change the policy repo rate, which remains at 8 per cent. Consequently, all other rates that are linked to the repo rate — the reverse repo rate (7 per cent), the marginal standing facility (MSF) rate and the Bank Rate (both at 9 per cent) remain unchanged. There has been no change in the Cash Reserve Ratio (CRR), which stays at 4 per cent. However, the Statutory Liquidity Ratio (SLR) of commercial banks has been reduced by 0.50 percentage point to 22 per cent.
The policy repo rate is the most widely watched monetary measure as it has a direct bearing on interest rates. This time there were very few who expected a rate cut, thereby, signalling a softer interest rate regime. The monetary and liquidity measures have entirely been in line with expectations. But that has not made the policy statement a non-event. Even before the policy statement was released, the focus had shifted to the future. Will there be a rate cut later this year? (By March 2015). What are the conditions that the RBI will set for easing monetary policy?
The only change in the monetary measures — the SLR reduction — is worth analysing. It is significant in that it signals the RBI resolve to maintain liquidity as and when the economy starts reviving. The recent cut closely follows an earlier one — in the June policy statement when the SLR was brought down to 22.5 per cent. As the policy statement explains, the June reduction was in anticipation of an economic recovery. Subsequently, the Union budget for 2014-15 renewed the new government’s commitment to medium-term fiscal consolidation. It also retained the ambitious fiscal deficit target of 4.1 per cent. This would open more avenues for banks to lend as growth picks up. The SLR cuts would release substantial sums for banks to invest.
Beneficial consequences However, as leading bankers have pointed out, most banks are holding SLR securities far in excess of what is required. So, its beneficial consequences through increased loanable funds to banks will be seen only when growth picks up.
A related move to change the accounting norms — the holding of investments under the held to maturity (HTM) category to facilitate greater participation by banks in financial intermediation has limited value today.
On the SLR cut there is another take. It signals India’s convergence towards global norms on what are called statutory pre-emptions (SLR and CRR).
The RBI is expecting a robust growth revival after sometime. For now, there has been a modest improvement in the growth drivers — export growth has picked up and that should support manufacturing and service sector activity. There are other favourable developments — a stable government and its pursuit of fiscal consolidation, unlocking of stalled projects and so on. But even granting all these, the RBI estimate of GDP growth for the current year remains the same as it was in April — a mean GDP growth rate of 5 per cent in a range of between 5 and 6 per cent.
Constant vigil For anticipating interest rate changes, the central bank’s observations on inflation are naturally relevant. It remains committed to the disinflationary path of taking CPI inflation to 8 per cent by January, 2015, and 6 percent by January, 2016. The near term target seems achievable now, but the disinflationary path needs to be sustained over the medium-term to achieve the medium-term target (of 6 per cent). The RBI has also pointed out that “the ‘balance of risks’ around the medium-term path are still to the upside and policymakers must be ready to meet any contingencies. Government actions on the food front and to facilitate project completion will improve supply, but as consumer and business confidence pick up, aggregate demand will also increase, necessitating constant vigil on the part of the RBI. From these two conclusions can be drawn. The possibility of a rate cut in the near future is remote. Therefore, it is the medium-term inflation target that will guide monetary policy. The RBI’s unrelenting focus on inflation will continue well into the medium-term.
narasimhan.crl @thehindu.co.in
