The RBI eased the CRR a little beyond market expectations, cutting it by 50 basis points. The liquidity deficit in the banking system has reached approximately 2 per cent of the net demand and time deposits, to an average of Rs1,27,853 crore for January 2012, compared with Rs 42,000 crore in the first fortnight of October 2011, and Rs 84,000 crore in the first fortnight of December 2011.
Though the headline IIP index recovered in November to 5.9 per cent, the GDP growth for the fiscal is expected to moderate. The RBI revised its fiscal year projection downwards from 7.6 per cent to 7.0 per cent. The good news, however, is the downward trend in inflation, which fell to 7.47 per cent for the month of December from 9.11 per cent in November.
This is the first time since April '11 that the overall inflation has dipped below 9 per cent. All the major components of primary, food and non-food inflation also showed a marked decline and were 3.07 per cent, 0.74 per cent and 1.48 per cent, respectively for the month of December. Manufactured products inflation, however, was still at 7.41 per cent, declining marginally from 7.70 per cent for the month of November.
Policy action needed
It seems the inflationary pressures in the domestic economy have abated for now. However, for the long term, the government needs to take policy action to improve agricultural productivity and efficient supply chain of agricultural produce so that sufficient capacity is created and the system is not overburdened.
The growing consumption demand will keep exerting increasing pressure on food production and inflation spikes and high inflation periods will become more common. Inflationary pressures in the form of high global crude and commodities prices will continue to remain.
The credit and deposit growth rates have moderated and banks will be impacted, facing the effects of a slowing down economy and rising NPAs as well as moderating credit offtake and shrinking margins. These might remain muted for another quarter before the regulatory stance shifts to an expansionary monetary policy.
Signs of improvement
We might still have to wait for a quarter before the monetary policy shifts towards stimulating growth but there are increasing signs that things will improve hereafter. Fiscal tightening is, however, in order.
(The author is National Leader, Global Financial Services, Ernst & Young)