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Issues on Global and Indian Economy

S Sarkar | Sunday 27 May 2012 ( 0 Comment)

RBI Makes a Move—Will the Government Reposition?

Surprising analysts and the market alike, the RBI reduced its key policy rate, the repo rate under the LAF, by a higher than expected 50 basis points to 8%. If the Government in turn can make a quick move to push forward important reforms measures, together it can provide tremendous boost to India’s wilting economy hurt by weak global growth. RBI’s decision could have been guided by the fact that India's industrial output not only rose a much slower-than expected 4.1% in February, the January figure was sharply revised downwards to a growth of 1.14% from 6.8% announced earlier.
CRR has been left unchanged at 4.75% against expectation of a reduction, instead liquidity cushion has been provided by raising the borrowing limit of banks under the marginal standing facility (MSF) from 1% to 2% of their NDTL outstanding; the MSF rate, determined with a spread of 100 basis points above the repo rate, stands at 9%. Liquidity in the system has improved since end-March with daily average borrowings by banks under the LAF averaging less than rupees one trillion in April as compared with Rs1.9 trillion in end-March.  Interest rates on short-term monetary market instruments such as commercial papers and certificates of deposits as well as 91-day treasury bills have come down in April, but the stiff long-term rates signal that the outlook on interest rates is not benign and market participants are betting on a rise in rates. Banks have already started passing on the reduced rates to their borrowers, while some banks with strong deposit bases have also reduced the rates offered on deposits. RBI’s stance however, remains hawkish; in terms of bias or guidance, the RBI has clearly indicated that headroom for further rate reduction remains limited given the upside risks to inflation in the near-to-medium term. In this situation it is now clearly the Government’s turn to show some progress in its multi-pronged reforms agenda put forward in the Union Budget, before the positive effects of the central bank’s rate cut wear off.    
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See our Monthly Statistical Bulletin E-UpDates's November-2011 issue as a sample.
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