The announcements in monetary policy are reminiscent of “A hundred small steps” mooted by Governor Raghuram Rajan. The policy attempts a judicious balance across multiple objectives by taking several baby steps on monetary, liquidity and developmental policies (take, for example, the revision of timings of marginal standing facility operations).
The reduction in MSF rate, coupled with enlarged liquidity provided through term repo window will ensure a significant decline in cost of borrowings for the banks, perhaps as much as 30 bps, ceteris paribus . Interestingly, the RBI in contrast to earlier policies, now seems more convinced about a recovery in FY14, when compared with street expectations.
We also believe the 5 per cent GDP projection has clearly an in-built assumption of high agriculture growth. We expect oil demand to come back to the foreign market in the last quarter of current fiscal.
Benign inflation outlook
Going forward, we expect a bias towards possibly no rate action in the remaining fiscal due to following reasons: (a) food prices are expected to fall from December 2013 due to a better harvest, which will subsequently put downward pressure on WPI and CPI, (b) growth concerns may abate by end of this fiscal with project clearances having a more pronounced impact at ground level, (c) the approaching elections and (d) a possible rate action in the last quarter of current fiscal may induce volatility in bond markets, that the apex bank may want to avoid prior to any possible news on QE tapering on March 17 and 18, 2014.
The declining growth in services sector and higher inflation in service sector, excluding housing (both rural & urban) deserves special mention. We believe core CPI elements face critical bottlenecks (healthcare, education etc.). Inflation in Items like clothing and footwear represent the aspiring needs of India’s young population and may remain elevated.
In a similar vein, in the Q4 FY13, GDP rose at a lower rate of 4.8 per cent, whereas, housing inflation for the same quarter was in double digits (10.4 per cent). It is possible that rapid urbanisation has increased the demand for housing both in metros and tier-II cities.
SAVINGS OPTION
There are several steps in the policy that are positive. For example, currently banks are offering interest on a quarterly basis on savings deposits and term deposits.
The RBI has now provided banks the option to pay interest on a shorter frequency, which is a value addition to the savings bank product as they will become near substitutes for money market mutual funds, which credit interest on a daily basis.
The RBI has also allowed banks to offer partial credit enhancements to corporate bonds by way of providing credit facilities and liquidity facilities to the corporates, and not by way of guarantee. This measure will provide a comforting factor to investors in investing in corporate bonds.
The RBI revised the timing of MSF operations to 7-7.30 pm instead of 4.45-5.15 pm with effect from November 5, 2013. The measure will reduce unnecessary volatility in reserve maintenance and borrowing under MSF window.
( The author is Chief Economic Advisor, State Bank of India. The views are personal )