Surprising analysts and the
market alike, the RBI reduced its key policy rate, the repo rate under the LAF,
by a higher than expected 50 basis points to 8%. If the Government in turn can
make a quick move to push forward important reforms measures, together it can
provide tremendous boost to India’s
wilting economy hurt by weak global growth. RBI’s decision could have been
guided by the fact that India's industrial output not only rose a much
slower-than expected 4.1% in February, the January figure was sharply revised
downwards to a growth of 1.14% from 6.8% announced earlier.
CRR has been left unchanged at
4.75% against expectation of a reduction, instead liquidity cushion has been
provided by raising the borrowing limit of banks under the marginal standing
facility (MSF) from 1% to 2% of their NDTL outstanding; the MSF rate,
determined with a spread of 100 basis points above the repo rate, stands at 9%.
Liquidity in the system has improved since end-March with daily average
borrowings by banks under the LAF averaging less than rupees one trillion in
April as compared with Rs1.9 trillion in end-March. Interest rates on short-term monetary market
instruments such as commercial papers and certificates of deposits as well as
91-day treasury bills have come down in April, but the stiff long-term rates
signal that the outlook on interest rates is not benign and market participants
are betting on a rise in rates. Banks have already started passing on the
reduced rates to their borrowers, while some banks with strong deposit bases
have also reduced the rates offered on deposits. RBI’s stance however, remains
hawkish; in terms of bias or guidance, the RBI has clearly indicated that
headroom for further rate reduction remains limited given the upside risks to
inflation in the near-to-medium term. In this situation it is now clearly the
Government’s turn to show some progress in its multi-pronged reforms agenda put
forward in the Union Budget, before the positive effects of the central bank’s
rate cut wear off.
The highlights
of the RBI’s Annual Monetary Policy for 2012-13 will be presented in the May
2012 issue of E-UpDates, Ecofin’s Monthly Statistical Bulletin.
