As expected, the RBI kept its policy stance unchanged, with growing focus on anchoring inflation. India is discomfortingly slipping into prolonged period of below potential growth and persistently elevated inflation. While enough has been discussed about the receding private capacity creation amidst increased fiscal excesses, no measures have been undertaken by the policymakers to tackle the widening supply-demand balance.
Investment growth
Investment growth has declined sharply from an average of over 15 per cent during FY06-FY08, to a dismal sub 6 per cent in FY12. In fact, there are no signs of improvement, given that the numbers of new investment proposals and projects that have been stalled or delayed continue to languish near two-year lows.
At the same time, while private consumption has been slowing, from 8.7 per cent during between FY06-FY08 to 5.5 per cent in FY12, the decline has not been enough to offset the fall in investment, thereby pushing up the price pressures.
The supply-side bottlenecks have led to persistently high inflation even as the growth momentum slows. The RBI very correctly highlighted the rising inflationary risks amidst uncertain monsoons, suppressed energy prices, weak currency and high input prices.
On the liquidity management front, the SLR cut of one percentage point came as a surprise. The SLR cut is likely to translate into some improvement in the margins of the banks.
However, given that overall SLR holdings of the banking system is close to 28 per cent and the holdings are unevenly distributed, such a move is likely to provide liquidity comfort only to banks that have been maintaining exactly 24 per cent as SLR.
In due course of time, as liquidity conditions may tighten in H2, the SLR cut is likely to ease pressure on the banks and allow for more room for private lending.
(The author is India Economist, ING Vysya Bank.)