RBI Second Quarter Review of Monetary Policy 2012-13

Today (i.e. 30.10.2012) RBI had announced “Second Quarter Review of Monetary Policy for 2012-13”. It had announced in his statement (click here for full statement) that: Based on an assessment of the current macroeconomic situation, we have decided to:

Ø   Cut the cash reserve ratio (CRR) of scheduled banks by 25 basis points from 4.5 per cent to 4.25 per cent of their net demand and time liabilities (NDTL) effective the fortnight beginning November 3, 2012.

Ø   The reduction in the CRR, will inject around `175 billion of primary liquidity into the banking system.

Ø   There is no change in policy interest rate. Accordingly, the repo rate under the liquidity adjustment facility remains at 8.0 per cent.

Ø   Consequently, the reverse repo rate under the liquidity adjustment facility (LAF), determined with a spread of 100 basis points below the repo rate, will continue at 7.0 per cent, and the marginal standing facility (MSF) rate, determined with a spread of 100 bps above the repo rate, at 9.0 per cent.

It had the above mentioned following stands:

i. enable liquidity conditions to facilitate a turnaround in credit growth to productive sectors so as to support growth;

ii. reinforce the growth stimulus of the policy actions announced by the Government as inflation risks moderate; and

iii. anchor medium-term inflation expectations on the basis of a credible commitment to low and stable inflation.

Within few hours of RBI Second Quarter Review Finance Minister made following statements to the media:

"Growth is as much a challenge as inflation. If government has to walk alone to face the challenge of growth, then we will walk alone," he said in his reaction to the RBI's second quarter policy review. 

He also stated that “Government is doing its best to send the clear message that we are on the path of fiscal consolidation. It is my hope that everyone will read and understand the government commitment to path of fiscal consolidation. I haven't read last few paragraphs of the statement but if it holds out hope for the future I look forward to that future”.

My Perspective:

The RBI stance on Monetary Policy had received many criticism and many economist/analyst are disappointed of its Second Quarter Review. I am not at all surprised by this move of RBI since the reputation of RBI is already at stake. RBI may not have surprised the economy in positive manner but definitely it did surprised the economy in its own ways (of course in negative manner) as it does in the recent past. If one reads the reasons for the policy stance, especially third point "anchor medium-term inflation expectations on the basis of a credible commitment to low and stable inflation", then one will realise that RBI in its Mid-Quarter Review Statement (on 17th September, 2012) had reduced CRR by same 25 percent and injected Rs. 17, 000 Crore primary liquidity into the banking system. For this stance it had said that "As inflationary tendencies have persisted, the primary focus of monetary policy remains the containment of inflation and anchoring of inflation expectations. In this context, the Government’s recent actions have paved the way for a more favourable growth-inflation dynamic by initiating a shift in expenditure away from consumption (subsidies) and towards investment (including through FDI)."

Many may argue that it was the expectation of the outcome but since it was not achieved RBI had made the current stance. True, the expected outcome had not been Achieved, but, on what basis the current stance of RBI is expecting that it will anchor medium-term inflation expectations on the basis of a credible commitment to low and stable inflation? The present market situation needs a boost in investments in order to stimulate the economy. No doubt, at the same time we need to have eye on inflation; when one notice the present scenario then one can realise that most of the inflation may be due to failure of supply side boost. Inflation even though most of the times monetary phenomenon, does not mean that only through Monetary Policy measures it can be controlled. RBI again fails to read the situation of the economy and provide appropriate policy measures.