Comments
Today's policy has completed a whole circle of expectations.
There was little expectation of a rate cut, particularly after the repo rate was cut by 50 basis points in April — until the Q4 GDP growth numbers (5.3 per cent) were announced.
This was followed by new 10-year bonds which brought down the yield by 20 basis points.
Then came the low IIP numbers and the global softening of crude oil price (though somewhat negated by a weak rupee) — and the expectation of a rate cut continued.
The May inflation numbers at 7.55 per cent provided a counter-argument of sorts in the last couple of days.
The market had clearly moved to the other side of pendulum in terms of rate cut and CRR cut expectations.
There is a greater political realisation of the need for change in the macro and fiscal landscape. But it is also generally accepted that such measures will take time.
Therefore, an aggressive monetary policy action was expected. The RBI has stated that it frontloaded policy rate reduction in April, but the same was not followed up with the fiscal consolidation critical for inflation management — along with other supply-side initiatives.
From this point of view, inflation remains a concern; it seems like the RBI would wait for some signs of fiscal and supply-side initiatives to help bring down inflation, before taking any major steps.
In terms of liquidity, the RBI has assured that they will use open market operations to ensure that there is no systemic liquidity shortage.
Though the central bank has increased the limit of export credit refinance from 15 per cent of outstanding export credit to 50 per cent, which will potentially release Rs 30,000 crore (equivalent to a 50 basis point cut in cash reserve ratio), how much ends up being used is not certain. The market will still depend on open market operations for liquidity.
Going forward, one can expect that the RBI's action will depend on steps taken in terms of macro and fiscal policy initiatives to moderate inflation, apart from global price movements. In our opinion, it's a question of when the RBI will cut rates, and not whether they will cut the rates.
(The author is Managing Director and Country Treasurer, Global Market Group,Bank of America N.A.)
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.