As widely expected the Reserve Bank of India's mid-quarter Monetary Policy review both the Policy rates and the cash reserve ratio (CRR) unchanged.
The RBI had reduced the CRR by 75 basis points earlier, on March 9, for purely technical reasons as the reduction had to be synchronised with the beginning of a new fortnight, on March 10.
Even after this reduction (which released Rs 48,000 crore) the money market still exhibits tight liquidity conditions.
The liquidity shortfall is now no more frictional, it has turned out to be a structural problem.
At 4.75 per cent, the cash reserve ratio now does not provide too much of a cushion to the RBI for liquidity management in the extreme event of a “risk-off” scenario in the global markets, a resultant outflow from Indian markets and the consequent liquidity shortfall.
The safer option
Hence, reliance on open market operations (OMOs) will continue in the next financial year. So far, the RBI has followed auction route to conduct its open market operations.
I feel secondary market purchases will be a safer option as market participants tend to drive down yields under the auctions route.
It is now apparent that both monetary and fiscal policies have limited room left for manoeuvrability to initiate pro-growth measures.
High inflation, a rising current account deficit and the depreciating rupee are constraining monetary policy from pursuing a pro-growth direction. On the other hand, the profligate policies pursued by the Government in the past, during the good times, are now forcing it to do fiscal consolidation at a time when growth is faltering.
For too long have monetary and fiscal policy worked at cross-purposes, and the current conundrum is a direct outcome of that.
Increased risk
The unprecedented fiscal and monetary stimulus given by global policy-makers has failed to produce ‘economic outcomes' and instead is only manifesting in ‘market outcomes'.
In this scenario the risk of global financial markets slipping from “risk-on” to “risk-off” mode has increased dramatically.
It will be interesting to see how domestic monetary and fiscal policies respond to this challenging global situation.
For the present, the prospect of the Reserve Bank of India reducing the Policy rates in April is receding, given the recent surge in crude oil prices and uncertainty regarding credible fiscal consolidation.