The Reserve Bank of India in its Annual Monetary Policy Statement for FY13 embarked on easing monetary policy by delivering a larger than expected dose of 50 bps cut in the repo rate (now at 8.0%). This action was guided by essentially two factors — that growth has declined substantially below the post-crisis trend rate, and core inflation moving within the comfort level. With this front loading of monetary easing, the RBI has nudged the government to galvanize its efforts to accelerate fiscal consolidation efforts and stimulate business confidence by focusing on mitigating supply bottlenecks through structural reforms.
By giving precedence to growth in this policy, the RBI has strived to address the concerns on macroeconomic stability manifesting through deterioration in the twin deficits, and banking sector asset quality in the economy. While upside risks to inflation persist, they largely emanate now from supply side inadequacies, wherein the government needs to step in expeditiously to bridge the demand-supply gaps. The RBI’s relative comfort on the level of core inflation and its future trajectory seems to indicate that the monetary policy has played an effective role in containing demand led inflationary pressures.
Nevertheless, managing headline inflation poses multiple challenges. As articulated by the Reserve Bank of India, the elevated level of crude oil prices and pending adjustments to domestic administered petroleum prices, coupled with suppressed inflation in the context of coal and electricity prices and recent depreciation in Rupee, are likely to limit any significant monetary easing going forward.
Departing from its earlier approach, the Reserve Bank of India today has delivered a calibrated and preemptive action to facilitate synchronization of efforts between the monetary and fiscal policy to improve the growth potential of the economy.
Rana Kapoor, Founder, MD & CEO, YES Bank