The Hindu Business Line : Monetary Policy review: Hint of early change?

Will there be any surprises, is the obvious question. Could the RBI tinker with the repo rates? If so, will it increase or reduce its benchmark rates. What about the Cash Reserve Ratio and Statutory Liquidity Ratio?

Govt borrowing programme

Any downward move in the last can be clearly ruled out. At a time when the Government is embarking on a massive borrowing programme, it is hardly propitious to think of cutting the SLR obligation of banks. Besides, it is not that banks are short of liquidity. On the contrary, the RBI finds itself overwhelmed with funds lodged with it in the daily repos. It also costs a lot of money — more than Rs 3,500 crore annually — in interest paid.

As the Government and the RBI survey the economy and financial markets, they must feel a quiet sense of satisfaction. The economy is doing pretty well despite the global recession. The severe setback to exports has not significantly impacted the overall situation. Mostly, it is only software, garments and textiles which have been badly hit.

Reluctance to expand

The investment climate is a different matter. Current business conditions are satisfactory but there is a transparent reluctance to expand or put up new projects. One (possibly a major) explanation is an unfriendly capital market. The Indian counterpart of the worldwide slowdown is capex postponement.

The RBI is bound to note that it is only the corporate sector which is the beneficiary of its cheap money policy. Small industry and business continue to pay much higher, sometimes punitive, rates of interest. Costly and tight money were always the reality for these segments.

Unlike the Fed, the RBI does not have the luxury (or even need given that the economy is ticking away reasonably well) of committing itself to a soft policy for a length of time. But a fall in agriculture could mean price pressures and having to make the uncomfortable decision of raising rates at a time when the economy is vulnerable.

As knowledgeable commentators have pointed out, the only extra stimulus delivered by Government was through the Pay Commission. It’s the RBI’s aggressive rate cuts and liquidity release that stabilised the situation before a systemic collapse.

The Monetary Policy Review will be a non-event in terms of policy, rate or reserve changes. However, it is likely to hint at an early reversal of easy liquidity (first) and rates should the economy gain traction in the coming months. The RBI will not be wanting in displaying its credentials as an inflation fighter.

In short, there should be something for everyone: the pro-growth sections of business and academia (and the Finance Minister?) will be happy with the policy continuance and the inflation hawk at the prospect of quick tightening to stub incipient inflation risk.

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