The Hindu Business Line : Maintenance dose

At first glance the Reserve Bank of India’s Mid-Term Review policy stance may appear to be on predictable lines with status quo maintained on key rates. After all, New Delhi had sent adequate signals, from the Prime Minster downwards, to continue the easy money policy for a while. The RBI appears to have bowed to New Delhi’s concerns, and restricted itself to tweaking its own easy policy at the margins; by raising the SLR to the old level of 25 per cent, increa sing provisioning norms for advances to the real estate sector and asking banks to realign risk weights for funds to infrastructure non-banking finance companies. In the process, the RBI has sent out very obvious signals that it might just be preparing for an exit from its easy money policy. That exit however will not be easy in the absence of favourable circumstances.

Consider the economy itself; so long as its growth remains tentative, the pressure on the central bank to continue with existing rates will not ease. Right now despite the rise in industrial output firms are going easy on capacity expansion, a feature reflected in private investment growth falling to 4.2 per cent in the current year’s first quarter from 9.2 per cent in the corresponding quarter of 2008-09; and credit offtake dipping to around 10 per cent this June. Besides, government investments that had buoyed up the expansion process this year is now moderating; finally, exports too are yet to pick up. In effect then, the jury is still out on just how the economic recovery will pan out. That explains the RBI’s own modest forecast of 6 per cent as against the Prime Minster’s Economic Advisory Council’s slightly higher prognosis. With all the key demand components depressed, the RBI’s easy money policy and surge in liquidity has not translated into robust credit expansion; in fact credit growth has fallen consistently from 29.4 per cent last October to 11.2 per cent this month. The RBI has also repeatedly noted the ‘structural rigidities’ in transmission of its rate changes on credit markets; the weighted average lending rate by banks in March 2009 had fallen just a percentage point to 11.1 per cent over twelve months.

Yet inflation fuelled by excess liquidity cannot be wished away; the moot question is whether fiscal policy can lend the RBI a helping hand. Curbing market borrowings and trimming subsidies would bring some financial discipline and fill the yawning deficit; it would also give the RBI an option to continue its current policies for economic revival into the fourth quarter.

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