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

The Economic Times - - Commodities Plus -

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

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