RBI CREDIT POLICY - A NO-NONSENSE, HARD HITTING POLICY

By Ruma Dubey

Yesterday itself RBI had made its intentions pretty clear. The extremely hawkish macro report published by RBI indicated that it continues to remains concerned about retail inflation and the rising current account deficit. It stated without ambiguity that interest rates cannot be the primary driver behind this growth.  

And if one had read that report, it would have become pretty evident that RBI was not going to everything which the market wanted. RBI reduced the repo rates by 25 bps to 7.25% which means the reverse repo will automatically get adjusted to 6.25%. CRR was left unchanged at 4% and bank rate now stands adjusted at 8.25%. All these changes come into immediate effect.

On the liquidity side, there was as such no pressure building up and if RBI’s eye was on inflation, then infusing more liquidity at this juncture through a CRR would have defeated the purpose. Thus the fact that it did not tinker with the CRR makes complete economic sense.

More ominous is RBI’s stance for the future – it has spelled out clearly in the Policy today that there is little space for further monetary easing.  RBI remains steadfast on its primary goal – to get down WPI inflation to 5% by March 2014. And when that is the goal post, it means that irrespective of the growth, RBI will continue to remain hawkish and one can forget growth impetus coming in from the RBI anytime soon.

With the 25 bps rate cut, it is unlikely that this would get transmitted by the banks to the people. So for people like you and me, it we were expecting EMIs to come down, well, that might not happen in a hurry. If at all it happens, it would be just a token cut, smaller than RBI’s token 25 bps cut.

RBI has minced no words and stated very clearly that things are looking sticky as we move ahead. The Governor, fearless and bold like always, has not played politics which is why its outlook is so different from what the Centre at Delhi has been projecting.  Delhi needs to fight a difficult election in 2014, Dr.Rao does not have any such power fears and he is doing his job with perfection.

Monetary policy action cannot give impetus to growth, it needs to be supported by removal of supply bottlenecks and making investment environment more conducive. Big projects are stuck in a morass and unless and until those projects take off, growth will continue to suffer.

This statement by RBI puts the onus back on the Govt, which is how it has to be.  He should not come under any pressure – neither from the Govt nor the market forces to make an economic decision. He has always done what is good for the economy; in fact at this point of time, he seems to be the only Govt agent working towards the good of the people! Thus he is doing what is best for the economy and not bowing down to the gallery, a trait rarely seen today.

Highlights of the policy:

• Policy repo rate cut by 25 basis points from 7.5% to 7.25%
• Consequently, the reverse repo rate gets calibrated to 6.25%
• Similarly, the marginal standing facility (MSF) rate  and also the Bank Rate, stand adjusted to 8.25%
• CRR remains unchanged at 4%
• Baseline projection of GDP growth for 2013-14 is 5.7%
• WPI inflation is expected to be range-bound around 5.5% during 2013-14
• RBI will endeavour to condition the evolution of inflation to a level of 5% by March 2014
• M₃ growth for 2013-14 is projected at 13%
• Aggregate deposits of scheduled commercial banks (SCBs) are projected to grow by 14%
• To increase the risk weights and provisioning requirements on banks’ exposure to corporates on account of corporates’ unhedged forex exposure positions.
• Guidelines for new bank licenses - in the process of preparing a discussion paper; to cover issues like consolidation of large sized banks with a view to having a few global banks, the desirability and practicality of having small, localised banks as preferred vehicles for financial inclusion, the need for a differentiated licensing regime for investment banks, and conversion of urban cooperative banks into commercial banks. The discussion paper will take into account international experience as well as our domestic situation.
• Increased loan limits to micro and small enterprises for priority sector classification
• The next mid-quarter review of Monetary Policy for 2013-14 will be announced on June 17, 2013.
• First Quarter Review of Monetary Policy for 2013-14 is scheduled for July 30, 2013