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The Reserve Bank of India cut the cash reserve ratio (CRR) for the second time in the last two months by 25 bps to 4.25 per cent to pre-empt liquidity pressures and reinforce the policy actions announced recently by the Government of India, intended to revive the economic growth momentum.
While the measures initiated by the Central government have boosted sentiments, a concrete revival in investment decisions, and thereby growth of credit offtake, is likely to take place with a lag.
Furthermore, with deposit growth expected to remain moderate and considerable Government borrowings planned for the second half of FY13, the RBI may need to introduce further liquidity easing measures if credit is to grow in line with the Central Bank’s baseline projection of 16 per cent.
While the guidance provided by the RBI is less hawkish than in the recent past, the downward revision in the GDP growth projection for 2012-13 (to 5.8 per cent from the earlier indication of 6.5 per cent) coupled with the upward revision in the baseline projection for headline WPI inflation for March 2013 (to 7.5 per cent from 7.0 per cent) is likely to curtail the extent of monetary easing in H2FY13.
Fiscal deficit
Notwithstanding the announcement of the new fiscal consolidation plan, it appears unlikely that the fiscal deficit would be limited to 5.3 per cent in the current fiscal year, given the continuing under-recoveries on various regulated fuels.
Additionally, a seasonal increase in gold demand may exert pressure on the current account deficit in H2FY13.
On balance, we expect further cuts in the Repo Rate to be limited to 50 bps in the remainder of the current fiscal year.
The guideline to increase the provisioning requirement for restructured assets is likely to add further pressures to banks’ profitability to the extent of 5-10 per cent of annual pre-tax profits, with a larger impact on public sector banks.
The RBI’s decision to harmonise the definition of infrastructure for the purpose of banks’ lending operations is likely to boost credit flow to certain sectors.
With the central bank continuing to strengthen the market infrastructure and the financial stability of the Indian financial system, we eagerly await the slew of guidelines expected in the near-term.
(The author is MD & CEO, ICRA Ltd)
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