Bud­get can cre­ate space for RBI’s next rate cut

The Pak Banker - - OPINION - Ta­mal Bandy­opad­hyay

THE 2 Fe­bru­ary mon­e­tary pol­icy re­view and Re­serve Bank of In­dia (RBI) gov­er­nor Raghu­ram Ra­jan's in­ter­ac­tion with the me­dia af­ter the re­lease of the pol­icy didn't have an iota of sur­prise. Ra­jan has taken ev­ery care to make the pol­icy re­view a non-event ahead of the Union Bud­get which will be pre­sented by the end of this month. The key pol­icy rate re­mained un­changed and ditto about banks' cash re­serve ra­tio (CRR), or the por­tion of de­posits that com­mer­cial banks need to keep with the cen­tral bank. While there was near-con­sen­sus that RBI would not bring down the pol­icy rate, there were half-hearted ex­pec­ta­tions in cer­tain quar­ters that the gov­er­nor might go for a to­ken cut in CRR to ease the pres­sure on liq­uid­ity.

In his post-pol­icy press con­fer­ence, Ra­jan spoke about liq­uid­ity short­age in the sys­tem but was not will­ing to give too much im­por­tance to it. He is will­ing to re­lease money into the sys­tem through many ways such as the RBI's repo or re­pur­chase win­dow, and bond-buy­ing from the mar­ket through the so-called OMO, or open mar­ket op­er­a­tions, but metic­u­lously avoided the men­tion of CRR. So, the bankers will have to live with Rs.1.5 tril­lion or more cash short­age in the sys­tem daily till such time the govern­ment de­cides to spend. Its cash bal­ance kept with the cen­tral bank at this point is al­most of the same amount. Ra­jan has left the growth fore­casts un­changed-7.4% for the cur­rent fis­cal year (with a down­side bias) and 7.6% for fis­cal year 2007 de­spite the re­cent mod­er­a­tion in in­dus­trial ac­tiv­ity.

"RBI holds in­ter­est rates as Raghu­ram Ra­jan awaits clar­ity from Bud­get 2016 On the in­fla­tion front, too, he is fairly con­fi­dent about achiev­ing 6% in Jan­uary. The 5% tar­get by March 2017 has been left un­changed with a caveat-this fig­ure has not been fac­tored in the im­pact of the 7th Pay Com­mis­sion rec­om­men­da­tions. This will put up­ward pres­sure on retail in­fla­tion; the cen­tral bank will ad­just its fore­cast af­ter clar­ity emerges on the tim­ing of im­ple­men­ta­tion. This cer­tainly shrinks the space which oth­er­wise RBI would have got for par­ing rates. Any­way, retail in­fla­tion mea­sured by the con­sumer price in­dex (CPI) rose for a fifth suc­ces­sive month in De­cem­ber across all cat­e­gories and house­hold ex­pec­ta­tions for in­fla­tion re­mains el­e­vated. Does that mean there will not be any more rate cut even as Ra­jan has com­mit­ted to con­tinue with an ac­com­moda­tive mon­e­tary pol­icy stance? There will be, but prob­a­bly not as many rounds as the mar­ket had been ex­pect­ing. The tra­jec­tory of mon­soon will play a key role (along with the oil price move­ment). Af­ter two years of in­suf­fi­cient mon­soon, prob­a­bly this time around it will be nor­mal; the Aus­tralian Weather Bureau has also pre­dicted that El Nino con­di­tions will fade over the next few months.

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