<p>Reversing the interest rate cycle after three years to boost investment and growth, the Reserve Bank of India (RBI) now wants the government to act on fiscal consolidation and oil price deregulation to supplement monetary action. The central bank has also cautioned the scope for monetary easing would narrow down if the government slips on subsidy target.
RBI Governor D Subbarao said demand pressures would persist if subsidies were not contained as indicated in the Budget. Also, it would “reduce whatever space is there for monetary easing”, he told analysts and researchers in an interaction.
Yesterday, RBI announced reduction in the key policy rate or the repo rate by 50 bps to eight per cent to boost growth, which has moderated.
On deregulation of oil prices, Subbarao said on Wednesday that “the earlier (it is done) the better.” He admitted that deregulation would spurt fuel prices in the short run, but assured that the central bank would monitor if it leads to generalised inflation. “The probability of hiking rates is not zero, but it is small... just as the probability of easing interest rates further is also not zero but modest.”
He said the growth-inflation dynamics permitted the reduction of 50bps in policy rate now, though modest deviation in growth and upside risks to inflation might limit the space for further rate cut actions.
The bank had raised policy rates for thirteen times between March 2010 and October 2011, and had been in wait-and-watch mode since then. The rate cut action in the Annual Monetary and Credit policy 2012-13 signalled the start of the rate-reversal cycle.
RBI also increased the marginal standing facility borrowing limit for banks from one per cent to two per cent of net demand, and time liabilities (NDTL) even while keeping unchaged the cash reserve ratio in the Annual Policy. The measure, it said, would provide liquidity cushion for banks.
Subbarao said the bank would monitor and try to maintain liquidity deficit in the zone of +/- one per cent of NDTL. Lumpy government cash flows were adding to volatility to liquidity situation—and it could be reduced if there were even cash flows, he added.
The liquidity deficit peaked at Rs 2 lakh crore in the last week of March. Currently, it has reduced to Rs 80,000-100,000 crore. The overnight call money rates have also eased from above 10 per cent to eight per cent in the same period reflecting improvement in liquidity on the back of increased government spending.
In the Annual Policy meeting held yesterday, the central bank had assured bankers that it would actively manage liquidity in the backdrop of higher government borrowing. The government has pegged Rs 5.79 lakh crore of gross market borrowing this financial year. Of this, 65 per cent will be concluded in the first six months itself.