RBI sets sights on growth momentum

Romesh Sobti,
MD & CEO, IndusInd Bank

All these positive cues have helped RBI to deviate from its main agenda of maintaining market stability

The market approached the monetary policy with a positive note and bullish undertone. All markets – money market, foreign exchange, stocks and commodity – have reversed their bearish stance (post-January 2009 policy) and exhibited signs of stability.

More importantly, there is a liquidity over-hang in the system and the market stands reassured about RBI’s ability to push through government borrowings without disruption in the market. The excess liquidity has guided term rates and bond yields lower to acceptable levels.

There are signals of off-shore liquidity flowing into domestic bourses and debt market which has guided Rupee stability. Inflation is low with stable crude oil and excessive money supply not being a risk factor.

All these positive cues have helped RBI to deviate from its main agenda of maintaining market stability (with acceptable price volatility) and focus on the critical issue of putting the growth momentum on track. Given the fact that availability of liquidity at affordable cost is there to stay in the near term (till July 2009 policy), the expectation on run up to the policy was to hear from RBI on its strategies to direct excess liquidity (currently over Rs 1 trillion) from Reverse Repo counter into productive sectors of the economy.

Given these expectations ahead of the policy, delivery of 0.25% cut in policy rates for LAF corridor of 3.25-4.75% is a kind of balancing act, as placement of “cap” on Reverse Repo may not be a prudent solution, given the fact that the current excess liquidity is near term in nature.

The cut in the Repo Rate is a facilitating nudge to the downtrend in lending rates as RBI remains concerned about the lag between cut in Policy Rates and lending rates of banks. The benefit will definitely will accrue to borrowers with a downward shift in rate structure by minimum 0.25% with partial benefit in the short term bond yield curve with 1Y T-bill expected to range trade within 3.75-4.0% and 10Y bench mark at 6.25-6.50%.