In Tuesday’s policy review, the Reserve Bank of India (RBI) has articulated the pain in the economy is going to intensify this financial year, with a reduced gross domestic product growth forecast of 6.5 per cent and an increased inflation forecast of seven per cent. The adverse impact stems from the continuing global financial crisis, uncertainties on crude oil prices, slowdown in capital inflows, concern on the rising fiscal and current account deficits and a poor monsoon. With food prices rising again, and non-food manufactured products inflation not coming off, inflationary pressures are going to be aggravated. Under these circumstances, RBI has maintained status quo on the policy rates since April.
In the recent period, liquidity conditions had eased considerably, with a decline in government cash balances with RBI, injection of liquidity through open market operations and increased use of export credit refinance. Thus, the one per cent reduction in the statutory liquidity ratio (SLR) came as a surprise for the market. This would effectively free up about Rs 60,000 crore for lending, though the banking system already has excess SLR at about 30 per cent. The immediate impact of the SLR cut, however, has been a sell-off in government securities, resulting in an increase in yields by 10 basis points on 10-year government securities.
RBI has reiterated it would try to ensure liquidity levels are comfortable. However, given the current circumstances, its stance is hawkish. It has clearly stated lowering policy rates would aggravate inflationary impulses without stimulating growth. With reining in inflation being RBI’s foremost priority, it is evident the markets must give up any hope of lower interest rates, at least in the near term.
Keki M Mistry
Vice-Chairman & CEO, HDFC Limited