CREDIT POLICY - AS EXPECTED, A NON-EVENT

By Ruma Dubey

After the RBI in a surprise move, cut CRR by a whopping 75 bps last week, one was actually left wondering about the purpose of the RBI Credit policy today. Whatever had to be done was already done, so most had written off this policy largely as a non-event. And RBI did not disappoint – there was no change in the interest rates.

But what does come forth from the statement put out by RBI is that though inflation worry does remain, its perspective has now expanded to burgeoning fiscal deficit, crude prices and the rupee depreciation which could lead to a further ballooning of current account deficit. RBI has stated that there remains a significant suppressed inflation in fuel, fertiliser and power. Stress is more emphatic on deficit situation. RBI feels that much of the rise in fuel, fertilizer and power is not passed on to the consumer and this non reflection on administered price is worrying.  

Growth can be supported by liquidity or rate cuts or both. RBI is supporting growth in its own way by CRR cut. It is trying to control inflation by keeping rates high. RBI is doing what it is supposed to do. It is also assuring the market that if inflation does come down, it will cut rates. It has not overtly indicated that there will be any rate cut in April.

RBI’s tolerance for slower growth seems to have also increased considerably and its reaction function has now expanded to fiscal deficit, rupee movement and global commodity prices. Global crude prices are not in our control, but fiscal deficit is  - by reducing subsidies but that happening, in the background of the railway budget, seems highly unlikely. RBI has clearly taken a cautious view, fiscal consolidation is important to control inflation.

At this juncture, with the Union Budget looming large tomorrow, it would be imprudent to predict what the RBI might do in April. It depends on how the Budget unfolds tomorrow. But looking at the brouhaha created over the nominal rate hike in railway fares, with politics taking precedence over economics, one cannot help but wonder how much the Govt will really be able to do, in terms of reducing subsidy, essential to bring down the fiscal deficit. With Mamata hyperventilating, and holding the UPA Govt to ransom, there is now worry about how much the Budget will be able to plough ahead, without rollbacks. Thankfully, at least the RBI is allowed to do what needs to be done without politics taking center stage!

But if the Govt does not do much in the Budget in terms of consolidating deficit, RBI will surely sit tight on the rates in April too. The ball has been in the Govt's court for some time now; its just that the Govt does not want to play; rather is not allowed to play!