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Monetary policy: RBI maintains status quo - Views on News from Equitymaster
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  • Dec 16, 2011

    Monetary policy: RBI maintains status quo

    After making big moves over the past 18 months, the central bank has decided to maintain a status quo for the time being. In its mid quarter monetary policy review today, the Reserve Bank Of India (RBI) maintained the cash reserve ratio (CRR) at 6%. The repo rate (rate at which banks borrow from the RBI) was also kept unchanged at 8.5%.

    Over the past year India's macroeconomic fundamentals have taken a turn for the worse. GDP growth has plummeted below 7% and the IIP numbers have also sunk into the negative, according to the latest available data. Action or maybe the lack of in this case was required from the RBI to prevent a further dip in growth numbers. The unresolved situation globally also hasn't helped matters much. A weak economy globally puts pressure on emerging market economies due to slowing export demand. In light of slower growth in these countries, central banks in Brazil, Indonesia, Thailand, etc have all cut interest rates. Being conservative as usual, the RBI has not followed its counterparts, opting instead for a mere pause in rate hikes.

    Bank credit growth in the country has taken a turn for the worse, with most banks seeing a reduction in credit demand. While most banks have still managed to see some balance sheet growth this fiscal, most of this growth has come from existing sanctions. New sanctions and disbursements have soured. Thus, even next year the credit growth situation doesn't look very upbeat. The year on year (YoY) non-food credit growth came in at 17.5% on December 02, 2011. This comes in below the projection of 18% for the year.

    The way forward

    With so much uncertainty looming overhead, it's hard to predict what the next action step for the central bank will be. Inflation seems to be on a downward trajectory, but credit growth is seeing a slowdown. Downward pressure on the rupee is also making the situation difficult. If it persists, fuel inflation will be a bigger worry than just food inflation. Things overseas also aren't looking too rosy, and may not be for a while. We can cheer that the RBI has conceded that slowing growth is a major concern, by pausing rates for the interim. Thus we can breathe easy for now, even if it is only for a short while. But, a formal assessment of inflation and growth numbers is still due in January 2012. We sure hope the New Year has good tidings for India Inc.



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