The stock markets were being unrealistic in expecting the Reserve Bank of India (RBI) to cut benchmark rates in its mid-quarter monetary policy review on Tuesday, if its initial reaction was anything to go by. This was, after all, only a mid-quarter review in between the RBI’s quarterly review on October 30 and the next one due on January 29. Viewed from the central bank’s perspective, nothing really has changed to warrant a reduction in its key lending (‘repo’) rate right now. True, the all-commodities wholesale inflation slid to a 10-month low of 7.2 per cent in November and, within that, ‘core’ non-food manufactured products inflation – which is more amenable to control through interest rate tinkering – had fallen even more to 4.5 per cent. But then, November also saw consumer price inflation go up to 9.9 per cent from the previous month’s level of 9.75 per cent, indicating no respite at the retail end. Given this contrasting trend, a ‘repo’ rate cut would have been inconsistent with the RBI’s position of according primacy to “containing inflation and anchoring inflation expectations”. Even if one might not agree with this stance, inconsistency is certainly something the RBI cannot be accused of.
But couldn’t it have at least brought down the cash reserve ratio (CRR), the percentage of their deposits banks have to maintain with the RBI without earning any interest? To this too, the RBI’s riposte would be that the current CRR rate of 4.25 per cent is the lowest since December 1974. If the objective is only to augment banks’ lendable resources, it could very well be done through the central bank’s open-market purchases of bonds: In the current month alone, it has infused some Rs 23,250 crore of primary liquidity through this route.
While Tuesday’s ‘non-event’ may have disappointed those who should not have expected anything in the first place, they may still draw comfort from the RBI’s explicit reference to monetary policy likely to “increasingly shift focus and respond to the threats to growth from this point onwards”. Coming from the RBI, it could point to rate cuts happening in next month’s quarterly review, by which time the inflation data for December, too, would have been out. The one positive news here is sowing for the rabi season, which has been good after the setback in kharif from delayed monsoon rains. If that helps further moderate inflationary pressures, the stage is set for the central bank to decisively shift its policy stance to support growth. Having waited so long, the industry and Finance Ministry mandarins can afford to wait for one more month to allow the RBI to act on its latest guidance, which is clearly dovish. The Government, too, can do more for fiscal consolidation, which would help release its own resources for productive investments to complement the RBI’s rate cut actions.