No-action policy from RBI, but growth focus clearer
RBI holds rate, experts expect policy easing by January

Economy Dec 18, 2012

Just a little bit longer please, Subbu tells Chidu, India Inc

By Sourav Majumdar

A day after the government made out a strong case for some supportive steps from the Reserve Bank of India (RBI) to bring back some serious growth energy into the economy, a cautious RBI Governor Duvvuri Subbarao decided to send out a strong signal that the central bank will likely do so, but not right now.

The government-and corporate India-will have to wait just a bit longer, until January, when the RBI will take a serious look at the growth-inflation dynamic with a view to spurring growth and introducing steps for monetary easing.

The painful wait for New Delhi is significant since the mid-year economic analysis . Reuters

That was the singular message sent out from RBI's Mint Road headquarters today, when the RBI unveiled its mid-quarter Monetary Policy review.

There was one big surprise though: while few expected a rate cut right now, there were expectations of a cut in cash reserve ratio (CRR) to ease liquidity further. But even that did not happen. It was total status quo from RBI, indicating that the January policy review will be crucial.

The painful wait for New Delhi is significant since the mid-year economic analysis unveiled by the government on 17 November scaled down growth projections for FY2013 to between 5.7 percent and 5.9 percent, much lower than the hugely optimistic-almost unrealistic-projection of 7.6 percent budgeted at the beginning of the fiscal.

The revised figure is far lower, but marginally higher than the 5.4 percent average of the first two quarters of the current fiscal, suggesting the government hopes growth to pick up in the two remaining quarters to about 6 percent.

The RBI's biggest challenge, inflation, has been easing marginally. As the central bank points out in its mid-quarter review, headline WPI inflation edged down to 7.2 percent in November, "mainly owing to softening of prices of vegetables, minerals and fuel". On the other hand, prices of cereals and protein-based items such as eggs, fish and meat firmed up further. "Significantly, core (non-food manufactured products) inflation eased, aided by decline in prices of metals, cement and chemicals."

But retail inflation remained elevated even in November, reflecting what RBI calls "sustained food inflation pressures, particularly in respect of vegetables, cereals, pulses, oils and fats. The non-food component of the index also suggested persistent inflationary pressures."

Sections of economists are supporting the RBI's status quo stand for now. "RBI has very objectively preferred to maintain status quo. Even as WPI has corrected lower, there is a clear discomfort with the CPI (retail) inflation. RBI could be more concerned with the fiscal- and current account deficits and correction in these areas remain crucial for RBI to exhibit comfort in the lower inflation bias," said Indranil Pan, chief economist at Kotak Mahindra Bank.

However, in the clearest indication that the central bank is no longer as rigid on keeping inflation as its topmost priority and will support the government's pro-growth steps, the policy statement also points to the fact that headline inflation has been below RBI's projected levels over the past two months.

"The decline in core inflation has also been comforting. These emerging patterns reinforce the likelihood of steady moderation in inflation going into 2013-14, though inflation may edge higher over the next two months," the central bank explains. In other words, while RBI does expect inflation to ease over the next fiscal, there is a possibility of a short-term spike.

But what could be music to the ears of both the finance minister and corporate India, RBI also adds that with inflation pressures ebbing, "monetary policy has to increasingly shift focus and respond to the threats to growth from this point onwards."

More importantly, it says: "Liquidity conditions will be managed with a view to supporting growth as stated in the SQR (second quarter review), thereby preparing the ground for further shifting the policy stance to support growth."

Overall, recent inflation patterns and projections provide a basis for reinforcing our October guidance about policy easing in the fourth quarter, the RBI said.

There's the obvious caveat, though: "However, risks to inflation remain and accordingly, even as the policy emphasis shifts towards growth, the policy stance will remain sensitive to these risks."

Though there will be some immediate howls of protest that the governor didn't even do anything on CRR, the RBI's words of comfort on a more-than-likely policy easing come January should provide relief to a corporate sector clamouring for rate cuts since long.

Significantly, despite the lack of action from RBI's end, the BSE Sensex remained flattish and didn't show any panic or downturn after the statement from RBI was made public.

For Finance Minister Palaniappan Chidambaram despite the long wait for a push from RBI's end, the latest policy statement could signal that in January, New Delhi and Mint Road may finally end up on the same page on how to steer the economy forward.

by Sourav Majumdar

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