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Vishwavir Ahuja

After a slew of liquidity management measures over the past two weeks, not much was expected from the maiden quarterly review of annual Monetary Policy by the Reserve Bank of India Governor, Dr D. Subbarao.

The recent cuts in CRR, repo-rate, unwinding of MSS and other monetary measures have ensured that sufficient liquidity has been injected into the banking system in the wake of global financial volatility. The central bank did well to spring into actio n when the liquidity conditions threatened rather than waiting for the scheduled review.

There is now some stability in the liquidity position, with the movement of overnight call rate back to the interest rate corridor and absorption of liquidity by the RBI under the liquidity adjustment facility (LAF), prompting the Governor to keep the key rates intact and directing the focus back to price stability.

The policy clearly brings out the RBI’s endeavour to modulate the monetary overhang and make sure that inflationary pressures are not fuelled.

The global economic conditions have worsened since the last review. There is clear evidence of a global recession. Although Asia is putting up a strong defence against this global trend, the growth momentum is seen sliding. The domestic indicators are, again, not very positive.

Industrial output sank to a seven-year low, with a slowdown being witnessed in almost all segments of consumer, basic, capital and intermediate goods. The weaker rupee has failed to boost the exports due to restraints in external demand.

With the subdued world economic scenario, liquidity conditions and uncertain credit conditions, even the revised growth forecast of 7.5- 8 per cent is unlikely to be achieved.

In the background of growing global uncertainty, there is, however, respite on the inflation front. A sharp correction in global commodity prices has eased the pressure on prices in India. Successive weeks have witnessed a decline in the inflation index. The festive season is expected to boost consumer demand.

There are also indications of crude oil price benefits being passed on to the consumers. However it is too early to expect a sharp decline in the inflation numbers, given the unfavourable base effect and erosion of trade gains due to weaker currency. Inflation continuing to rule in double digits and significantly above the RBI target figure, there is no denial that the inflationary conditions remain a critical concern.

Global funding pressures have been showing some signs of easing. The special market operations of swapping bonds-for-forex and several policy measures announced to encourage capital flows and boost funding will see the flow of funds to the developing countries.

A calmer economic situation and a drop in global prices will pave the way for a more stable rupee and dollar.

More Stories on : Monetary Policy | Economy | RBI & Other Central Banks

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