RBI may have given all it has

T. T. SRINIVASA RAGHAVAN | Updated on April 17, 2012 Published on April 17, 2012


One does not feel a great sense of optimism, going through the policy statement.

These are some of the facts that would have confronted the Reserve Bank Governor and his team, as they sat down to formulate the Annual Monetary Policy

Fact No.1- Inflation is not under control. While the latest WPI number has come in below 7 per cent, the Consumer Price Index is still hovering close to 9 per cent.

Fact No.2- The rupee is ruling weak and signs are that things could get worse. Imports have significantly outstripped exports. The current account deficit at close to 4 per cent and a mounting oil import bill do not augur well.

Fact No.3- GOI has announced plans to borrow Rs. 3,70, 000 crore, between April and September 2012, which could result in the already-tight liquidity situation worsening significantly and crowding out private sector borrowings.

As an objective onlooker, one would believe that these present a rather strong case for a rate hike! But there are a few other facts that they would have considered, as well.

Fact No.4- The latest IIP numbers are far from encouraging and even more disconcertingly, the credibility of those numbers is now being doubted.

Fact No.5 -There is intense pressure from the Finance Ministry, markets, industry lobbies and the media – to cut interest rates and put the economy back on the growth path.


Reading the policy announcement today, the latter set of facts would seem to have weighed more heavily with the RBI. One does not feel a great sense of optimism, going through the policy statement. If at all, there is a reiteration of the concerns stated above and the continuing unease with regard to global developments.

Growth has clearly prevailed over inflation concerns, which is probably the right way to go. The moot question, however, remains, whether this higher than anticipated reduction in policy rates will indeed kickstart growth.

I am afraid that the answer to the growth conundrum is not as uni-dimensional as people would have us believe.

Policy paralysis, leading to falling business confidence (both among domestic companies and foreign investors), global uncertainty, with its consequent impact on oil prices, mounting problems on the infrastructure front and a growing fiscal deficit, to name only a few, have much more to do with falling growth rates, than the badly flogged interest rates.

Significantly, the RBI has said that “The inflation scenario remains challenging and that upside risks to inflation persist. These considerations inherently limit the space for further reduction in policy rates.”

Earlier wisdom was that we could expect a 50-75 bps reduction in policy rates, towards the latter half of the fiscal year. So, has RBI given away all that it has, at one go?


Headline inflation has, for the moment, come down to 7 per cent and liquidity seems to be heading towards RBI's zone of comfort, but there is very little else to cheer about.

Viewed in that backdrop, the RBIs 'generous' rate reduction probably deserves a muted cheer!

(The author is Managing Director, Sundaram Finance Ltd.)

Published on April 17, 2012
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