Monetary Policy: RBI finally bites the bullet - Views on News from Equitymaster

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

  • MyStocks

MEMBER'S LOGINX

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

Monetary Policy: RBI finally bites the bullet

Jan 29, 2013

With inflation slowing, the Reserve Bank of India (RBI) finally bit the bullet, and turned its focus towards stimulating growth in the Indian economy. The central bank gave India Inc a bounty of New Year's gifts in 2013, even as it cut the country's GDP growth forecast.

Thus, in order to boost growth in the economy, the central bank decided to cut the cash reserve ratio (CRR) and the repo rate by 0.25%. These rates now stand at 4% and 7.75% respectively. The cut in the repo rate was widely expected, however the CRR cut is also more than welcome, with an additional Rs 180 bn in liquidity being injected into the system.

How the situation has changed on the ground

Globally the situation is seeing some signs of improvement. At the beginning of 2013, the US narrowly avoided falling over the fiscal cliff. And just this week, the Congress voted to suspend the nation's US$ 16.4 trillion borrowing limit until May 19. In Europe also risks of the sovereign debt crisis disrupting the financial system has somewhat ebbed. China is also expected to see a pick-up in the pace of growth.

On the inflation front, the latest data from India was encouraging. Headline wholesale price index (WPI) inflation eased significantly from 8.1% in September 2012 to 7.2% by December. However, inflation based on the new combined (rural and urban) consumer price index (CPI) rose to 10.6% in December, largely reflecting a surge in food inflation, especially in prices of pulses and other protein-based food items. However, supply side issues still need to be addressed. Keeping in view the moderation in non-food products inflation, and global trends in commodity prices, the baseline WPI inflation projection for FY13 has been revised downwards from 7.5% to 6.8%

Growth numbers in India were however far less encouraging. Exports contracted in December for the eighth month in a row, reflecting depressed external demand and structural bottlenecks. Imports were higher on the back of higher oil prices and gold imports. In order to stem this, the import tax was hiked from 4% to 6%. The slowdown in net exports and outflows of investment income payments is expected to widen the current account deficit (CAD) further, beyond the level of 5.4% of GDP recorded in 2QFY13. The central bank cut its GDP growth rate forecast from 6.5% (latest revised to 5.8% in October) to 5.5% for FY13.

Banks have been cautious in lending on account of asset quality stress. However, with policy rates being cut, banks may follow suit which may in turn lead to more credit demand, especially in the final quarter of FY13. However, the RBI has kept its credit growth forecast unchanged at 16%.

Going forward

The RBI finally responded to pressure from the industry and the government to cut rates. A monetary cut at this time will help improve sentiments and revive growth. The major reasons the central bank opted for a rate cut at this stage was on account of slowing inflation and GDP growth falling well below the trend line. However, risks still remain in the Indian economy with respect to the historically high CAD, global contagion risks, sticky inflation, and various policy/structural issues still persist for investment in the infrastructure sector. Future monetary policy stance will largely depend on the government's policy initiatives. Recent government reforms, especially partial deregulation of diesel prices, has staved off near term risks on the fiscal front. However sustained fiscal consolidation is needed in order to create room for further monetary easing. Well, all eyes are now on the Union Budget due at the end of February.

Equitymaster requests your view! Post a comment on "Monetary Policy: RBI finally bites the bullet". Click here!

  

More Views on News

CITY UNION BANK Share Price Up by 6%; BSE BANKEX Index Up 0.6% (Market Updates)

Mar 2, 2021 | Updated on Mar 2, 2021

CITY UNION BANK share price is trading up by 6% and its current market price is Rs 178. The BSE BANKEX is up by 0.6%. The top gainers in the BSE BANKEX Index is CITY UNION BANK (up 5.8%).

How the YES Bank Collapse Unfolded - 10 Points (Sector Info)

Mar 9, 2020

A timeline of how YES Bank went from a stock market darling to a pariah.

Today's Stock Market Crash: 10 Points (Sector Info)

Mar 6, 2020

Top factors that dragged the markets lower today.

More Views on News

Most Popular

It's the Beginning of a New Bull Phase in Smallcaps (Profit Hunter)

Feb 24, 2021

Last time the smallcap index crossed 19k a big correction followed. Here's what makes it different this time.

Make Rs 5,000 Per Day Trading the Market (Fast Profits Daily)

Feb 25, 2021

In this video, I'll show you how to get started on the path to daily trading profits.

I Believe the Investment of the Year Will Be...

Feb 19, 2021

In this episode, ace trader Brijesh Bhatia talks to us about the best investments of 2021, his profitable trading system, and much more.

The Hidden Tesla in My Great Indian Wealth Project (Profit Hunter)

Feb 23, 2021

An Indian company founded three decades ago in a garage caught my attention...

More

India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE BANKEX


Mar 2, 2021 03:36 PM

MARKET STATS