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Busy season monetary policy highlights - Views on News from Equitymaster
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  • Oct 26, 2004

    Busy season monetary policy highlights

    The RBI has announced its busy season monetary policy and has hiked the short-term interest rates in the form of higher repo rate. The same have been raised by 25 basis points to 4.75%. The overall stance of the monetary policy as per the RBI is as follows:

    • Provision of appropriate liquidity to meet credit growth and support investment and export demand in the economy, while placing equal emphasis on price stability.

    • Pursue an interest rate environment that is conducive to macroeconomic and price stability, and maintaining the momentum of growth.

    • Consider measures in a calibrated manner, in response to evolving circumstances with a view to stabilising inflationary expectations.

  • Click here to know more about the Monetary policy: What it means to you?

    The central bank has left the bank rate untouched at 6%, while it had earlier raised the CRR to 5% from 4.5%. As expected, the monetary policy did make its stance clear on short-term interest rates and raised the same considering the inflationary pressures prevalent in the economy. In fact, the RBI has raised its projection for the point-to-point inflation rate based on WPI for the year 2004-05 to around 6.5% as compared to 5% projected earlier. The main highlights regarding the RBI's view of the Indian economy is as follows.

    • As far as the outlook for the Indian economy in 2004-2005 is concerned, the RBI has stated that India's GDP is expected to grow between 6.0% and 6.5% in FY05, compared to its earlier estimate of between 6.5% and 7%. The RBI's forecast is based on sustained growth in industrial sector, revival in the investment climate, close to normal monsoons and good performance of exports. However, inflation continues to be a concern and this has led to the lower forecasted growth in GDP.

    • Projected expansion of money supply (M3) for 2004-05 has been retained at 14.0 per cent. The RBI has also forecasted a higher offtake in non-food credit compared to the previous year. The expected growth in non-food credit is pegged at around 19% for FY05.

    • Continued emphasis has been placed on the agricultural sector, considering the high dependence of the country on the same. RBI has provided further sops in the form of enhanced lending to small and marginal farmers as well as higher limits on advances for dealers in agricultural machinery.

    Having looked at the highlights, what should a retail investor draw from this policy?

    The GDP growth expectations have been further lowered compared to the monetary policy projection in May. So, investors who were banking on the fact that India has moved to a different growth trajectory need to have more realistic expectations regarding the same. Also, the RBI has laid considerable emphasis on the inflationary pressures prevalent in the country. The RBI has indicated that while it has not changed its monetary policy stance considerably, it has warned that the markets have to be prepared for uncertainties.

    RBI has also left the bank rate unchanged indicating that it does not want to stall the economic growth, despite the current high level of inflation. Also, by leaving the long-term interest rates untouched, the RBI will help the nascent investment cycle to realise its full potential. All these measures indicate that the RBI's stance is cautious.

    In final analysis, while at the broad level the monetary policy may have been as per expectations, the raising of repo rates indicate that the RBI will not shy away from raising interest rates in the future if there is adequate pressure to do so. Overall, we would advice the retail investor to be cautious towards the equity markets as rising interest rates have an impact on the equity markets as well.



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