After a pause in the monetary policy in December, it was clear Reserve Bank of India (RBI) was shifting its focus towards growth. But there was uncertainty on when it would begin cutting rates. Today’s move of cutting cash reserve ratio (CRR) by 50 basis points is a clear shift in policy towards easing of interest rates. But its decision to hold rates at 8.5 per cent reflects caution. It indicates the central bank wants more comfort on inflation before they actually begin to cut rates.
Food inflation will remain low for some more time due to high-base effect before reverting to its trend. The trajectory of food inflation in 2012-13 would depend on whether we would have a third consecutive normal monsoon. The core inflation should soften as demand growth is coming down faster than anticipated. The fuel inflation remains a worry as prices of several petroleum products continue to be suppressed leading to bloating of the oil subsidy bill. Not surprisingly, therefore, RBI has cut down its guidance on growth to seven per cent for 2011-12, while maintaining its inflation forecast at seven per cent by March 2012.
The caution on inflation front from RBI should be appreciated in view of the stubborn inflation and elevated inflationary expectations in the last two years. In addition, the expected fiscal slippage this year would exert some upward pressure on demand.
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After a pause in the monetary policy in December, it was clear Reserve Bank of India (RBI) was shifting its focus towards growth. But there was uncertainty on when it would begin cutting rates. Today’s move of cutting cash reserve ratio (CRR) by 50 basis points is a clear shift in policy towards easing of interest rates. But its decision to hold rates at 8.5 per cent reflects caution. It indicates the central bank wants more comfort on inflation before they actually begin to cut rates.
