Relevant policy in turbulent times: S S Mundra

In line with the market consensus and our own expectations, the Reserve Bank of India (RBI) today left the policy repo rate and the cash reserve ratio unchanged at 7.25 per cent and four per cent, respectively, citing concern over sticky retail inflation, especially food inflation, and growing imbalances on the balance of payments (BOP) front.

What weighed the most on today's decision was the significant depreciation in the rupee - it fell about seven per cent in the May 22-June 11 period. RBI is not just worried about the high current account deficit (CAD) but also about the composition of capital flows. Therefore, it has clearly said its future policy action would be governed by the impact of recent measures in controlling CAD and the emerging pattern of capital flows, which in turn depend upon investors' risk perceptions.

The other factor behind the fact that no policy action was taken today was the persistence of food inflation, especially for cereals and vegetables.

While the tone of the policy continues to remain hawkish, according to RBI, monetary policy would be determined by how the growth and inflation trajectories, as well as the BOP situation, evolve in the months ahead. In specific terms, RBI is waiting to see a durable decline in inflation and this alone would enable it to address risks to growth.

As far as commercial banks are concerned, they remain committed to depositors and, therefore, might not reduce deposit rates drastically, owing to the stubborn retail inflation. At the same time, they have been realigning sectoral lending rates to suit the requirements of vulnerable sectors such as retail, MSME (micro, small and medium enterprises), etc, to address risks to growth.

At this point, there are some definite positives in the economy. First, the onset of the southwest monsoon has been strong and on time. Second, at 4.9 per cent of gross domestic product, the Centre's fiscal deficit for 2012-13 has been better than expected. This encouraged global rating agency Fitch to revise India's sovereign outlook from 'negative' to 'stable'. Also, the government is proactively trying to improve project clearances, as well as implementation in the infrastructure sectors. Against this backdrop, we are hopeful of growth-supportive monetary policy action in the future.

S S Mundra

Chairman & Managing Director, Bank of Baroda