The third quarter review of monetary policy was aimed at addressing the systemic liquidity deficit and supporting the flow of credit to various sectors of the economy, given the heightened concerns on growth indicators.
Improving confidence
While this action would infuse around Rs 32,000 crore of primary liquidity, the central bank stressed that it was not inconsistent with the prevailing anti-inflationary stance of monetary policy.
The preference for a CRR cut as opposed to further open market operations seems to be aimed at improving the confidence levels of industry and market players, given the moderation of economic growth.
The RBI highlighted a shift in the monetary stance towards growth concerns, which is a welcome development.
Weak industrial growth, sluggish investment activity and global growth concerns prompted the central bank to revise its baseline projection for GDP growth for FY-12 to 7 per cent from 7.6 per cent.
Nevertheless, the RBI kept the policy rate unchanged, in line with our expectations, citing upside risks to its projection that headline inflation would moderate to 7 per cent by March 2012.
Policy measures
Further, the central bank indicated that a reduction in the policy rate would take place subsequent to signs of a sustainable moderation in inflation.
Consequently, the RBI has again urged the Government to hasten the introduction of policy measures to improve the investment climate, which would support growth and ease some supply-side impediments to inflation, and revert to fiscal prudence to contain inflationary pressures in the economy.
Stoking inflation
Given the central bank's concerns that rupee depreciation and adjustment in prices of fuel items on account of suppressed inflation may stoke inflationary pressures, the RBI is expected to refrain from announcing further open market purchases of Government securities in the near term. It may keep the repo rate unchanged in Q4 2011-12, and embark on monetary easing in April 2012.
(The author is MD & CEO, ICRA Ltd.)