A wait-and-watch approach

ASHVIN PAREKH | Updated on March 09, 2018 Published on October 30, 2012

The RBI, in its second quarter policy review, revised the expected year-end growth figure to 5.8 per cent from the earlier 6.5 per cent and inflation figure to 7.5 per cent from the earlier 7.0 per cent.

While the growth-inflation dynamics and resultant monetary policy has dampened growth, persistent inflation is preventing expansionary measures.

This not only indicates structural problems but also the need for fiscal policy to support the monetary policy.

The structural issues in the agricultural production and supply chain need to be addressed to remove rigidities and leakage, which contribute to system inefficiencies. A high growth environment is unsustainable if the production and supply chain is unable to adjust and support the growing demand, leading to overheating and dampening of growth.

Sluggish numbers

The IIP numbers have been sluggish with only a 0.4 per cent growth for the April to August period compared with last year.

The prevailing economic scenario also has had an effect on the bank credit and deposit growth rates, which have decreased almost 5-6 per cent from March to 13.7 per cent and 12.3 per cent, respectively, as on October 5, 2012.

The liquidity situation deteriorated slightly in the past fortnight and the CRR cut will help ease liquidity concerns. However, going forward, the RBI will have to do a fine balance in thinking of ways to prop the credit growth, which looks likely to dip further, in the last quarter.

The RBI, perhaps, has done the right thing in adopting a wait and watch policy towards interest rates. While the government has announced plans to curtail fiscal deficit to 5.3 per cent for FY13 and 4.8 per cent in FY14, it is expected to be tough, given the compulsions of general election.

It is necessary that fiscal and monetary policy work in tandem to balance growth with moderate inflation. However both the growth and inflation risks look likely to worsen in the third and fourth quarter of the current financial year before improving in the next financial year.

Additionally, significant policy announcements in the context of new banking licence guidelines, wholly-owned subsidiaries for foreign banks and holding company structures were expected from the regulator and some direction on the way forward would have provided a sense of comfort to the hopeful applicants.

(The author is National Leader, Global Financial Services, Ernst & Young. Views are personal)

Published on October 30, 2012
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