A well-calibrated monetary policy: S S Mundra

The monetary policy announced today has been appropriately calibrated to address the risks to business confidence, growth and liquidity.

A significant easing of both the cash reserve ratio (CRR) and repo rate of 25 basis points each, is certainly supportive of growth. A reduction in the key policy rate for the first time in nine months was driven by softening of both headline (WPI) inflation and its core component and economic growth staying below its trend for almost 22 months. Moreover, continued tightness in liquidity despite the cuts in CRR around mid-2012 and various instalments of open market operations during December-January, triggered a further reduction in the CRR to four per cent, though it was already at its lowest since December 1974.

While the central monetary authority has lowered its baseline projection for real GDP growth from 5.8 per cent to 5.5 per cent for 2012-13 and for inflation from 7.5 per cent to 6.8 per cent for March 2013, it has not abandoned its cautious stance and has tied future policy action to the evolving growth-inflation dynamics and management of risks from the twin deficits.

At this juncture, the major worry for the Reserve Bank of India (RBI) is the stresses on balance of payments and their implications for the currency and overall macroeconomic stability. Hence, in its economic review, it has said even if inflation recedes further, the wide current account deficit may slow the pace of monetary policy easing. RBI has also sensitised the public about the inflationary risks originating from suppressed inflation, pressure on food prices and high inflation expectations getting entrenched into the wage-price spiral.

While the emerging inflationary scenario and fiscal policy actions will remain critical for monetary policy moves, today’s move has been definitely supportive of investor confidence and all financial markets, including the currency market.

S S Mundra
Chairman & Managing Director, Bank of Baroda