The Hindu Business Line : Quick on its feet

The RBI has cut the repo and reverse repo rates by 0.25 percentage points each, to 4.75 per cent and 3.25 per cent respectively, while the CRR has been kept unchanged. Some segments of the market were expecting a cut in the key rates, with still further expectations of a cut before the next policy review in July. The latest action takes the cumulative cut on the repo rate to 4.25 per cent from a high of 9 per cent.

Growth expectations

The RBI’s view on the monetary policy, considering the stress facing the economy, is in line with other major central banks of the world. The uncertainty surrounding the global economic environment has not abated, and most surveys still expect further downward revision in growth expectations.

A survey of professional forecasters, as on March 2009, shows a further downtrend in GDP growth expectations for India.

As per the RBI survey, the median GDP growth expectation for the financial year 2009-10 now stands at 5.7 per cent. Central banks across the world are taking unprecedented measures to tackle the economic woes, and the RBI has indicated that its stance would be similar. The central bank has maintained that the Indian financial system is stable, though the country is not insulated from the effects of global developments.

Credit growth

As anticipated, the central bank has also expressed its disappointment at the deceleration in credit growth and has encouraged commercial banks to take action in this regard.

The central bank’s task is made difficult because the economic environment is undergoing very sharp swings. For instance, WPI inflation has moved from a high of 12.9 per cent to around 0.2 per cent in the span of eight months. This kind of an economic environment makes it imperative that the central bank display an increased openness towards flexibility in its use of various policy instruments. This has been amply demonstrated by the cuts in the CRR, repo rate, MSS buybacks, auction-based buybacks of government securities combined with relaxations on ECB norms and encouragement of more foreign fund inflows. This broad-based approach seems to be a step in the right direction in the current scenario.

Flexible approach

The central bank has made it quite clear that the policy response of the bank would be quick and can include conventional and unconventional responses, as and when the situation warrants. Given that we have already witnessed the exercise of a broad set of policy tools it is reasonably evident that the RBI would continue to keep a flexible approach and its actions would be directly dependent on developments on the macro-economic front and the financial markets.

(The author is Group General Manager and Country Head, HSBC India.)

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