With inflation concerns largely dominating the minds of the monetary mandarins, the Reserve Bank of India (RBI) has virtually no elbow room at the moment to get out of the `pause mode' and ease the interest rate. As though waiting for the assembly elections to get over in States such as Uttar Pradesh, the Railways has quietly put up freight rates on assorted commodities including coal, foodgrains and fertilizers by 20 per cent. While this would beef up the annual earnings of the Railways by around Rs.18,000 crore, this would sure have a serious cascading effect down the line.
The Iran imbroglio in the wake of sanctions against it by the U.S. and European Union has permanently put India into an edgy situation vis-à-vis oil import. Tehran is the biggest exporter of oil to India after Saudi Arabia. The developing uncertainty in Iran is bound to have negative repercussion on India with attendant consequences on the overall economy.
The apex bank itself has, time and again, signalled to fiscal administrators (nay political leadership) that it would consider interest rate cut only if there is an enabling fiscal environment. Not surprisingly, it has even suggested de-regulation of diesel prices to reign in aggregate demand and trade deficit. It is very unlikely that the political leadership will have the courage to deregulate the diesel prices, given the politically sensitive nature of the issue.
Looked at from any way, the government is in an extremely tight situation. Coming as it did against these backdrop, the cut in cash reserve ratio (CRR) by 75 basis points by the RBI is viewed as a huge liquidity easing measure. With only a few days left for the current fiscal year to close, the CRR cut would provide banks a big relief faced as they are with heavy outflow from the system on account of advance tax payments by corporate India. A rough estimate puts this figure (outflow due to advance tax payment) at a huge Rs.40,000-60,000 crore. The CRR cut is expected to release around Rs.48,000 crore into the system. In the end, the cut in CRR is more in the nature of a ‘refill' exercise. And, the liquidity position in the bank “will remain as it were prior to the latest CRR cut.” The coincidence of the CRR cut, which comes immediately after a meeting between the RBI Governor and the Finance Minister and a few days ahead of the mid-quarter review of the monetary policy, is not lost on the discerning observers of the economy.
With the central bank sort of ruling out a cut in the interest rate, the onus is now squarely on the UPA Government at the Centre to bring the dipping confidence back. Will the original protagonist of reform back his Finance Minister to present an ‘out-of-box budget' this time around? As President Obama said in a different context, “yes, he can”.
