The Hindu Business Line : Money rates could crash

The half-yearly Monetary Policy created a lot of jitters in banks and corporates. Would the RBI reverse course on interest rates and liquidity, heralding the ‘exit’ of its rescue measures in the wake of the global financial crisis?

It didn’t. The Policy was preceded by a detailed account of global and domestic economic and financial developments. In the document, the central bank has pulled no punches in expressing its anxiety on inflation, the state of public finances, Government borrowing, balance of payments and the recent jump in asset prices. (Had this been released a day earlier — as used to be the case — an increase in rates and the CRR would have been considered a dead cert).

Clearly, there’s dichotomy between the RBI’s aggressive warnings and its restraint in keeping all key policy variables unchanged. The reason is not difficult to fathom. Government, from the Prime Minister downwards, has weighed in strongly in favour of continuing the soft monetary stance for more time. Even Dr C. Rangarajan, now Chairman of the Economic Advisory Council to the Prime Minister and a known conservative on monetary matters, thinks the time is not ripe for ‘exit’. The RBI was, obviously, left with no choice but to act – or not act – as it did. But is it going to be only uphill from now for interest rates and liquidity?

Don’t bet on it. The RBI puts GDP growth at 6 per cent, which is somewhat lower than the 6.5-7 per cent estimate of the Economic Advisory Council and Planning Commission. It may believe its assessment is more accurate. Or it could be posturing to justify staying rates.

The central bank is, rightly, not convinced that a sustained global recovery is under way. China, India and Brazil are the bright spots but the US, Europe and Japan outlooks remain cloudy. True, the first three have decoupled from the others. The question, however, is if that will endure.

For example, a flow of bad news on the economy and markets from the developed world is bound to adversely impact economies and markets elsewhere. Viewed in this perspective, the RBI’s inaction is better understood.

The knee-jerk reactions trumpeting the end of cheap money are, therefore, overdone. Not only is liquidity intact, there’s no sign of any end to liquidity addition either. Hence, there’s every prospect of Indian money rates and T-bill yields falling further to the region of 1-2 per cent.

The irony could be that the widely-expected tightening not only didn’t happen but drove rates in the opposite direction.

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