A Good Monsoon’ll Improve Growth Prospects
RBI’s recent policy measures are likely to usher in a more sustained rally in sovereign & corporate debt instruments; good rains can ease rural distress
impacted commodity prices, and measures by the government to contain food inflation. Though monetary policy may only have an indirect influence on reducing CPI, credit must be given to the RBI for bringing a strong focus on inflation targeting and ensuring that no efforts were spared by policy-makers to rein in inflation. The benefits are visible, giving RBI room to take rates to their lowest levels in five years and continuing to remain accommodative.
But this policy was not simply about the rate cut. The real story is the accompanying measures on liquidity framework. The RBI has reversed a six-year policy stance of maintaining the system liquidity in a deficit mode. Going forward, the RBI has decided to lower the deficit to a position of neutral- ity and also supply durable liquidity over the year as needed.
Why are bankers excited by this? This is the most definitive change in RBI’s liquidity stance since mid-2010. During this period, the economy has gone through a complete interest rate cycle, involving both rate hikes and cuts. However, the banking system operated on a liquidity deficit mode through the entire period. This was one of the factors influencing slow transmission of rate cuts into deposit and lending rates. Compare this with the period between 2003 and 2010 when RBI kept the system liquidity on a surplus mode. Average deposit and lending rates were lower then, than in the recent period. Past experience shows that apart from the rate, the quantum of liquidity availability also has an important influence on deposit and lending rates. Hence, bankers have been seeking better liquidity conditions through the last one year.
The policy measures are likely to usher in a more sustained rally in sovereign and corporate debt instruments. Going forward, the most important near-term factor for the economy would be monsoons. Besides helping rein in inflation and creating space for rate cuts, monsoons would be a welcome relief to alleviate the distress in the rural economy and improve growth prospects.
RBI has reversed a six-year policy stance of maintaining the system liquidity in a deficit mode