<p>Improves growth projection, prods banks to cut rates, keeps key rates unchanged
The Reserve Bank of India (RBI) today said prospects of an economic recovery in the middle of the financial year had improved, but laced the optimism with caution.
Though RBI Governor D Subbarao, who had lowered the growth projections in his two earlier quarterly reviews, appeared more optimistic this time, he was unwilling to significantly change the projection owing to the continued macroeconomic uncertainty. Growth projections for gross domestic product (GDP) have been revised to “6 per cent, with an upward bias”, from 6 per cent estimated three months ago.
With only early signs of recovery, the central bank decided to keep key policy rates unchanged. It also prodded banks to lower lending rates, saying the full pass-through of the monetary policy rate changes had not taken place. Besides, it said banks could pass on the benefits of the lower cost of funds due to the reduction in deposit rates initiated over the past several months.
| What’s driving growth? |
| * Lower interest rates, pick-up in credit off-take |
| * Better financing conditions, improvement in primary markets |
| * Industrial production has turned positive |
| * Improved corporate performance, food stocks |
| * Positive business outlook |
| What could dampen it |
| * Deficient rains pose may affect agricultural production, food price inflation |
| * Weak export demand |
| * Services sector may be affected |
| * Rebound in global commodity prices |
| * High fiscal deficit |
The caution was more evident on inflation, for which the central bank raised the projection to 5 per cent by the end of March 2010, against 4 per cent estimated in April when the annual policy statement was presented.
Inflation worries arose from high food price inflation, a rebound in global commodity prices and expansionary monetary and fiscal policy that could exert inflationary pressures.
Subbarao said the base effect of high inflation was likely to wear off in October and inflation based on the wholesale price index could be back in the positive terrain.
Already, RBI said, consumer price inflation and food price inflation were both high and though food stocks were sufficient, the uncertain monsoon could accentuate food price inflation.
At the same time, the central bank also factored in domestic demand-supply dynamics and trends in global commodity prices, which were showing an uptrend.
Economists agreed that the inflation could spoil the party.
“Given the current dynamics, we expect the WPI inflation to hover at 7.5-8 per cent in March 2009, which is well above the RBI comfort zone of 4-5 per cent. This increases the possibility of unwinding as early as Q4FY10 perhaps through an increase in the cash reserve ratio (CRR),” HDFC Bank said in a presentation.
“Against the backdrop of the RBI’s revised growth and inflation outlook, we believe that the bottom of the rate-cutting cycle has been reached,” Standard Chartered Bank said.
A banker present during the post-policy meeting, however, said that banks conveyed to RBI that the benefits of a lower rate regime had been passed on to borrowers, which was reflected in the lower borrowing cost for companies and a lower net interest margin for banks.
Subbarao admitted that he had had to do some tightrope walking to ensure that the Indian economy – which was supply- constrained – grew at 9 per cent rates.
He said the central bank had to strike a balance between the short-term compulsions of providing ample liquidity and the potential build-up of inflationary pressure.
In addition, he said that the government’s borrowing programme, which had resulted in hardening of bond yields, had militated against the low interest rate regime that was required to spur private investment, especially in the infrastructure sector.
“Going forward, the Reserve Bank will meet the challenge of spurring private credit demand by maintaining policy rates and liquidity conditions conducive for revival of private credit demand,” the first quarter review said.
While seeking a fiscal consolidation roadmap, RBI said, “This has to go beyond merely indicating revised FRBM (Fiscal Responsibility and Budget Management Act) targets to giving out the details of the adjustment that will take place on the revenue and expenditure fronts. That will lend credibility to the fiscal stance and also give predictability to economic agents.”
