RBI presses the exit button - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

RBI presses the exit button

Jan 29, 2010

Its Chinese counterpart made the move a couple of days ago. The RBI could not afford to be left behind. It too made up its mind on hitting the gear for sucking up liquidity. The Indian central bank released its third quarter review of Monetary Policy today. Not willing to let loose the inflationary spiral, it has come down strictly on the excess liquidity floating around the system. The instrument used has been the CRR or the cash reserve ratio. This ratio, at which banks maintain cash with RBI (as a percentage of their deposits), has been hiked by 0.75%. It is meant to suck out liquidity to the tune of Rs 360 bn. The hike will, in two stages, bring the CRR from 5% currently to 5.75% by the end of February 2010.

This watershed event marks the bottoming out of the easy liquidity scenario which unfolded since late 2008. As the RBI in its own confession remarks about the divergence in inflation number at the wholesale (WPI) and consumers' level (CPI), such a move is well understood. The widely circulated WPI number has been giving a benign impression of the trend in price rises. The rise at the consumer's level has, however, been relatively steeper. Thereby causing change in consumption patterns.

What however, has been a concern for the RBI is the risk of cheap liquidity being channelised to risky assets and creation of bubbles. Hints from China seem to have sufficed to make RBI more proactive. The rise in CRR therefore is not only well-timed but also in sufficient measure to contain macro risks.

Coming to the challenges that the RBI foresees for the economy, fiscal deficit tops the list. The bank is also hoping for the government to phase out some of the stimuli offered to pump prime the economy. The Union Budget 2010-11 is expected to throw more light on this. Meanwhile, the RBI has raised its GDP growth projection for 2010 to 7.7%. At the same time WPI inflation estimate has been pegged at 8.5% until March 2010. More importantly the bank opines that even post the rate hikes, there will remain sufficient liquidity in the banking system. It has, however, lowered the banking sector's credit growth projection for the current fiscal from 18% to 16% YoY.

Does the CRR hike solve the problem?

The answer is - no. The RBI believes that its monetary measures will be of little consequence unless the government mends its ways. The reversal of accommodative monetary stance cannot be effective unless there is also a roll back of government borrowing. The RBI warns that although the abrupt rise in government borrowing was managed through excess liquidity over the past two years, the same is no longer feasible.

Moreover, inflation pressures will remain and private credit demand will be stronger with the threat of crowding out becoming quite real. Thus the CRR hike is just a step in the right direction. It remains to be seen whether the government does its bit to ensure that the RBI's purpose is met.

Equitymaster requests your view! Post a comment on "RBI presses the exit button". Click here!


More Views on News

These Stocks Have Rallied Over 300% In the Last 12 Months. Is the Rally Justified? (Views On News)

Nov 12, 2021

As many as 150 stocks from the BSE 500 index deliver multibagger returns in the past one year.

Ultimate Guide to Hedging Your Portfolio (Fast Profits Daily)

Sep 21, 2021

How can you protect your portfolio in a market crash? Find out in this video.

Ride the Indian Real Estate Revival with this 'Different' Smallcap Stock (Profit Hunter)

Mar 23, 2021

Affordability in the housing segment has never been so good in last one and a half decade. Here's how you could make the most of it...

My Latest Stock Recommendation (Fast Profits Daily)

Oct 9, 2020

How I picked an exciting stock using trends from both the commodity and equity markets.

Data is the New Oil but It's Also the New Sugar. Here's How to Fight it (Profit Hunter)

Jun 1, 2020

Is too much data hurting your quest for market beating returns?

More Views on News

Most Popular

Offer for Sale (OFS): What Does It Mean?

Here's a quick guide to OFS in the stock market.

Infosys vs TCS: Which is Better? (Views On News)

Nov 26, 2021

In the post pandemic era, the top two IT companies in India are fighting to capture the growing demand for IT.

This Multibagger Stock Zooms 20% After Dolly Khanna Buys Stake (Views On News)

Nov 24, 2021

Shares of this edible oil company zoomed over 50% in three days after ace investor bought around 1% stake.

6 Popular Stocks that Turned into Penny Stocks (Views On News)

Nov 27, 2021

A look at popular stocks that crashed big time and never recovered, i.e. which went from 'Multibaggers to Multibeggers'.

How to Find Your Next 10-Bagger in this Market (Profit Hunter)

Nov 19, 2021

The #1 make or break factor in your portfolio you shouldn't ignore.


Become A Smarter Investor
In Just 5 Minutes

Multibagger Stock Guide 2022
Get our special report Multibagger Stocks Guide (2022 Edition) Now!
We will never sell or rent your email id.
Please read our Terms