Contrary to expectations of a 25-basis-point cut in the repo rate following the weakening growth indicators, the Reserve Bank of India has maintained the policy rate in its mid-quarter credit policy.

Notwithstanding its concerns regarding the slowdown in growth, the RBI’s focus seems to have shifted again towards managing inflationary expectations in view of persistent supply constraints, inadequate adjustment in demand and double-digit retail inflation.

The central bank’s decision to provide higher refinance limits to banks for extending export credit is positive as this would hasten structural adjustment through higher exports, while improving systemic liquidity (by around Rs 30,000 crore) and supporting the rupee.

The space available for further monetary easing may be limited to around 50-75 basis points over the remainder of 2012-13, with the timing of rate cuts to be influenced by growth-inflation dynamics, fiscal tightening measures and external events.

(The author is MD and CEO, ICRA Ltd.)

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