The decision to keep the policy rate on hold was not surprising, given RBI practically revealed its hand in the last monetary policy statement.
The decision to keep the CRR on hold was not a surprise, either. The CRR is not meant for micro-management of liquidity, as some might think, but is primarily part of the monetary policy tool kit.
Moving on to the tone of the statement, this was distinctively less hawkish than last time, with inflation and growth risks now more or less considered of equal concern.
RBI’s increasing worries about the global economy were not surprising, considering the lack of decisive progress in solving the crisis in Europe. Moreover, the more sobering tone on the domestic economy was expected in the light of the weaker GDP and high-frequency numbers since the last meet. The RBI also toned down its hawkishness on inflation because it expects weaker growth and favourable food supply will help keep inflation on the projected path. Still, RBI is not convinced yet that the fight against inflation has been won.
Looking ahead, we see the RBI on hold mode for a while. Although growth and inflation concerns are now more evenly matched, it will be difficult for the apex bank to cut rate, unless core inflation eases significantly and on a sustained basis. We do not see that happening in the near term.
Of course, if global economic conditions take another turn for the worse, the growth outlook could deteriorate sufficiently fast to significantly alter the inflation trajectory and call for an easing. We are not there yet.
Leif Lybecker Eskesen
Chief economist for India & Asean, HSBC
