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The Reserve Bank of India (RBI) has begun the new financial year on a positive note with a 25 basis points (bps) repo rate cut. While the endeavour is to bring growth back on track, tough environment made the task more challenging and limited the space available to RBI. Consumer price inflation, especially food inflation, continues to remain high. The unfavourable current account deficit (CAD) and uncertain global liquidity situation, possible capital outflows from emerging markets seem to have weighed on the regulator's mind and prevented steeper cuts in policy rates.
With gold and crude prices cooling off, the pressure on CAD could ease. Also, with expectations of a normal monsoon, the pressure on consumer price index may come down. RBI has indicated wholesale price index to be in the 5.5 per cent range, which will allow the regulator to look at easing in the forthcoming policy announcements.
I am hopeful that RBI would continue with monetary easing once it gets the right signals from some of the lead indicators. However, I am of the view that monetary policy action, by itself, cannot revive growth. There is a lot that needs to be done for easing supply bottlenecks, and stepping up public investment, alongside continuing commitment to fiscal consolidation. RBI and the government need to do a fine balancing act and manage the growth-inflation conundrum.
While the cash reserve ratio remains unchanged, RBI has promised it will manage liquidity to ensure adequate credit flow to productive sectors of the economy. We expect RBI to continue to inject liquidity through open market operations.
Under the prevailing circumstances, the rate cut is a welcome move and we need to look for more positive signals in some of the leading indicators before we see sustained lowering of policy rates.
Shyam Srinivasan
MD & CEO, Federal Bank
MD & CEO, Federal Bank
