The season of high decibel economic policy announcements which culminates with the Union budget on March 16 began quite unexpectedly and ahead of schedule. On March 9, just six days before a scheduled monetary policy review, the Reserve Bank of India cut the cash reserve ratio (CRR) by a larger than anticipated 0.75 percentage points. As intended, the move surprised market participants, not the least because the RBI has, in recent times, seldom stepped outside the dates of scheduled policy reviews to announce monetary measures. The central bank has justified the timing as well as the quantum of the rate cut. Expected to release some Rs.48,000 crore of impounded bank deposits, the move is meant to alleviate the liquidity shortage that has gripped the markets and which threatens to become even more severe by the middle of the month when outflows from the banking system by way of advance tax payments are expected to peak. In the RBI's assessment, its pre-policy intervention brooked no delay. A strict adherence to the conventional dates for making policy changes would not have helped at this juncture as the impounded money gets released after a lag. However, the decision to cut the CRR alone without touching the repo rates is akin to splitting the monetary policy review into two stages and raises the larger question as to whether the actual review on Thursday will be a non-event.

The government's Economic Survey, an essential adjunct to the budget process, is also due to be released on that date. The budget has been delayed this year while the monetary review is on schedule. Unless presented in a logical sequence, the surfeit of economic information covering the entire spectrum of monetary and fiscal policies can pose daunting challenges for those assessing their implications for macroeconomic policy. For instance, a repo rate cut rather than a CRR reduction would be a more potent signal for banks to reduce their interest rates. However, there is no evidence yet that the RBI has shifted its interest rate policy decisively. There are signs of suppressed inflation in key sectors such as fuel prices, fertilizer and food subsidies. Besides, inflation expectations have hardened and more than ever before, the RBI requires a firmer commitment from the government to join the battle against inflation. With the budget scheduled for the day after the monetary review, it is likely that the RBI will wait until April to act more decisively in bringing down interest rates. Important as the RBI's signals would be on interest rates, it is the budget that will hold the key to stimulating investment and savings.

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