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Guv refuses to oblige
Tue, Jul 31, 2012
Source : Sanjay Kumar Singh, Citrus Interactive

Though informed opinion held that RBI governor D Subbarao would abstain from cutting rates in the first quarter review of monetary policy, hope springs eternal among central bank watchers. In the event, the governor chose to practise tough love. He kept the repo rate and the cash reserve ratio (CRR) unchanged at 8 per cent and 4.75 per cent respectively, but reduced the statutory liquidity ratio (SLR) from 24 per cent to 23 per cent (a measure that will prove largely symbolic since most banks maintain a higher than mandatory level of SLR).
More ominously, the central bank provided further confirmation of what is now a well-established fact – that the economy is slowing down and inflationary expectations have got well entrenched. RBI revised its estimate of GDP growth for FY13 downward from 7.3 to 6.5 per cent and its year-end inflation target upward from 6.5 per cent to 7 per cent.
     
Inflation concerns predominate
In recent times, the central bank’s inflation-related concerns have heightened owing to a deficient monsoon, falling rupee, and lately, resurgence in the price of crude. WPI inflation has consistently remained above the 7 per cent level in recent months on account of rising food prices, increase in input costs, and upward revision in prices of administered items such as coal. Even though demand has moderated and the pricing power of corporates has weakened, headline inflation shows no sign of softening. As the central bank has rightly concluded, this reflects both severe supply constraints and entrenchment of inflationary expectations within the economy.
In the circumstances, cutting rates would have raised demand but would have done nothing to tackle supply-side constraints, the chief problem.  
Hence, despite all-round evidence of slowing growth, the central bank rightly felt it would be imprudent to cut rates. 
 
Ball in government’s court 
With the central bank adopting a hawkish anti-inflationary stance, the ball is back in the government’s court. The impetus for reviving growth will have to come from it.
The expected revision in administered prices of fuels (diesel, kerosene, and LPG), which was expected to take place after the Presidential elections and which would have helped contain the government’s fiscal deficit, has not materialised. The high hopes that had been unleashed by the Prime Minister taking charge of the Finance portfolio are also in danger of being dashed.

Now positive cues for the markets could come in the shape of monetary easing by the European Central Bank (ECB). In view of poor second-quarter GDP growth in the US (1.5 per cent) and weak employment numbers (less than 1 lakh new jobs added each month after April), the odds of a third round of competitive easing have also increased. 

But the best panacea for the economy and the markets would be policy initiatives from the Indian government that would rein in fiscal deficit, ease supply bottlenecks, and encourage private investments.
 
 
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