While deposit growth has slowed from 14.7 per cent at end-August 2012 to 12.8 per cent at end-November 2012, credit growth has accelerated marginally from 16.6 per cent to 16.8 per cent, respectively, exerting structural pressure on systemic liquidity.

Accordingly, we had expected the RBI to reduce the CRR by 25 bps in the mid-quarter review. Given its guidance that liquidity conditions will be managed with a view to support growth, the central bank’s decision to retain the CRR at 4.25 per cent of net demand and time liabilities of banks comes as a surprise.

With temporary stress likely to persist in the immediate term on account of advance tax outflows, the central bank may continue to infuse liquidity by conducting open market operations (OMOs).

Shift in stance

While the RBI cautioned that inflationary risks remain, the guidance provided by it indicates a clear shift in its stance towards boosting growth in coming months. Notwithstanding the spike in October 2012, industrial growth is expected to remain sluggish at around 3-3.5 per cent in Q3 of FY13.

The shortfall in kharif output indicated by the first advance estimates of crop production would also adversely impact agricultural growth in Q3 of FY13. Accordingly, ICRA continues to expect Indian economic growth to moderate to 5.4 per cent in FY13, from 6.5 per cent in FY12.

Although commodity prices and exchange rate movements will critically influence the trajectory of inflation, at present it appears that core inflation may remain below 5.5 per cent in the remainder of FY13. If headline and core WPI inflation remain largely similar to the initial print for November 2012, we expect the RBI to reduce the repo rate in the quarterly policy review to be held in January 2013 to bolster growth. However, the transmission of the same to lower borrowing and lending rates may further widen the liquidity deficit.

Liquidity pressures

Moreover, any expansion in Government of India’s borrowing programme in Q4 of FY13, in line with the anticipated slippage in the fiscal deficit relative to the target of 5.3 per cent, would add to the pressures on liquidity. Accordingly, the central bank may need to persist with liquidity easing measures through a CRR cut or OMOs to ensure adequate liquidity to support growth.

(The author is MD & CEO, ICRA Ltd)

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