A fortnight after surprising the markets with a 0.25 percentage point cut in benchmark interest rates, the Reserve Bank of India has opted for a standstill policy on rates in its bimonthly monetary policy review, which is along expected lines. When it cut rates on January 15, the RBI had clearly said that any further easing would be contingent upon data confirming the disinflationary trend and sustained high-quality fiscal consolidation. Given that there has been no significant development on either front, the central bank has decided to maintain an unchanged stance on interest rates. However, to improve liquidity, and in line with its policy of lowering the Statutory Liquidity Ratio to increase availability of funds for infrastructure lending, the RBI has reduced SLR by 0.50 percentage points to 21.50 per cent. This is expected to release about Rs.45,000 crore into the system. While the RBI is doing its bit to reduce lending cost and increase funds availability, banks seem reluctant to pass on the benefit to borrowers. After the RBI reduced rates last fortnight, only a couple of banks have so far attempted to reduce their lending rates. Though the transmission of policy rates by banks is always sluggish in the down-cycle, the current reluctance by banks is striking and is a direct result of the strain caused on their balance-sheets by non-performing assets (NPAs).
Meanwhile, the RBI’s bias towards further easing of rates is very clear, but the downward momentum will be determined by the pace of disinflation and the government’s fiscal stance in the coming Budget. Though inflationary expectations are at their lowest in 21 months, the risks stem from the traditional upswing in food prices at the onset of summer, the progress of the monsoon and a turnaround in global crude oil prices that have already rebounded from their lows in the last couple of days. The RBI will also be closely watching the government’s fiscal math and its commitment to keep the deficit within targeted levels. While the current account deficit is projected at a very comfortable 1.3 per cent of GDP for 2014-15, exports could suffer in the coming months thanks to the problems in the eurozone, which is India’s largest trading partner. The central bank also has reasons to be wary about the effects of the quantitative easing programme of the European Central Bank on India’s financial and currency markets. The projection of 6.5 per cent growth in GDP in 2015-16 is realistic, but a lot depends on the return of investment momentum and increase in consumption, both of which are sluggish at this point in time. Cautious optimism could well be the catchphrase to describe the country’s economic prospects in the near-term.
