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Dharmakirti Joshi

The month of October saw an extremely swift move by the RBI to address domestic liquidity concerns in an environment where severe stress in the global financial system began to impact Indian markets as well. The RBI actions signalled an easing monetary policy, going forward.

The cash reserve ratio (CRR) was cut by 250 basis points to infuse liquidity. This was followed by an equally steep and unexpected 100 basis point reduction in the repo rate. These moves were broadly in line with monetary softening stance of many other economies aimed primarily at alleviating the pain from the financial sector meltdown in the developed world.

With significant measures announced, there was not much sting left in the policy announcement. What one expected from the policy was the RBI’s prognosis of current macroeconomic scenario and clarity on the rationale for recent moves and the future direction of the monetary policy. More moves at easing the liquidity situation were expected. But given that call rates have come down significantly, the RBI decided to wait and watch before taking further liquidity enhancing measures.

There is little doubt about the advent of a cyclical downturn in the economy. Even with the growth forecasts being pared , the economy is expected to log around 7.5 per cent growth this year. In contrast, inflation continues to remain high and is expected to come down to single-digits only next year.

The RBI has also expressed concerns about inflation as well as high credit growth. The global financial sector woes have intensified and it is rubbing off on India too. So the need of the hour was to ensure ample liquidity, stability and confidence in the financial system. Consequently, financial stability and growth concerns were given precedence over inflation.

In the last few months, while downside risks to growth and financial stability have increased, inflationary pressures have started easing. Going ahead, inflation will come down; so will growth. As the monetary policy actions are forward-looking, easing of the policy is to be expected. The recent steps by the RBI have created an expectation that interest rates will ease, going forward. Clarity on this will emerge in the next few weeks as liquidity scenario unfolds itself.

More Stories on : Monetary Policy | Credit Policy

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