After 6 week long break RBI came out with damp squib by keeping the repo rate untouched. Ever since the Government dawned in new avatar after the political turmoil a sense of determination and urgency was evident in sticking to radical policy initiatives ranging from hike in diesel prices to FDI in retail.
Passage through worst economic crisis in post 2008 era Indian economy has been stuck in stagflation as low growth remained muddled in high inflation. Any monetary policy initiatives two fuel buying and growth harbored danger of runaway inflation. As a result RBI swaggered for the past 19 months trying to make the two ends meet.
Inflation still ticking at 7.81% (WPI) in September much above the self proclaimed comfort level of 4.5-5% by RBI. However with key economic growth parameters viz., GDP, IIP etc dwindling with each passing month deepening concern about the economy could not be overlooked. GDP estimate for 2012-13 by RBI plummeting to meager 5.7% was enough to raise hackles in the government. Even more alarming was the fiscal deficit likely to end at 5.8% of the GDP against a target of 5.3%.
Knee jerk reaction by government after shaking off the political morass it took slew of policy initiative to kick start economic revival in the penultimate year before the mid-term poll in 2014.
FDI in retail
Hike in diesel price
FDI in airlines
FDI in insurance sector
Disinvestment of PSU (INR 30,000 cr) - to be done in FY’13
Auction of 2G (INR 40,000 cr) - to be done in FY’13
Market reacted immediately with rally by nearly 6-8% in the post Mamta phase and INR appreciated by 5% giving a major reprieve to the current account deficit as oil import bill shrunk.
Regardless of the socialistic rhetoric by political parties populace had come to terms with the economic holocaust staring in the eyes lest they put up with hard economic decisions.
RBI took a regulatory path cautiously infusing liquidity by reducing CRR ratio plummeting by 1.75% to 4.25% from 6% during the course of one year. Avoiding a more abrasive reduction in repo rate and reverse repo rate at the peril of runaway inflation was prudent. However with today’s roll over ending in yet another reduction in CRR touted to infuse Rs17500 cr came as surprise to the government and market. While the Finance Minister fumed resolving to rage lone war market fretted by declining 1% (205 points).
Reserve Bank of India (RBI) may have been less critical of the government in its latest monetary policy state, but it also appears that the central bank is not convinced of the fiscal targets set by the finance ministry. Or perhaps, RBI may be waiting for signs of the government’s fiscal policies working, before signaling lower interest rates. To some extent the political uncertainty about cantankerous legislative amendments coming through in winter session seemed to cloud the confidence.
Theoretically the dichotomy between CRR and repo rate can be played only up to a point otherwise the policy rates start losing relevance. Q4 is expected to bring smiles back with policy initiatives yielding results.
5-year fiscal consolidation roadmap based on the Kelkar Committee recommendations with graduated reduction in subsidy and pegging of CAD and fiscal deficit at 3.7% and 5.3% in FY’13
Inflation finally peaking in Q3 and coming down in Q4 as impact of late monsoon on agriculture reduces food inflation.
Pick up in industrial production and demand with the banks reducing lending rate after correction in CRR. Results are apparent in Q3 with pickup in demand for consumer durables and housing loans.
Hike in diesel prices will bear results in reducing current account deficit and reduce inflation.
FDI in retail ensuing construction activity thereby boosting demand in infrastructure sector for steel, cement, power etc
One big large decision can change those numbers quite dramatically. What people are really saying is that look we are starting to run out of time. We are ending October, so we essentially have only four months to go. A lot will depend on the government able to weather the political storm in winter storm in getting legislative amendments for key policy decisions to see light of the day.
Even though the intent is good and resolute the coming days will prove the veracity till then it is better to keep the fingers crossed .
Source - Strategic Research Institute
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