Expectations From RBI Monetary Policy Review

RBI has been in anti-inflation monetary mode since March 2010 till recently when it paused for a while in October 2011. RBI had raised key policy rates 13 times in this period and maintained system liquidity in check by keeping the policy rates higher. Though this helped in controlling the inflation, it has seriously impacted the economic growth in last few quarters. Poor corporate results and tight liquidity with high cost attached to it is certainly and gradually weakening the economy. It has killed the investor sentiments and consumer confidence. I think the right time has come for RBI to shift into pro-growth monetary mode in the next RBI Monetary Policy Review. It is extremely important in the present situation to tackle economic uncertainties linked to growth and fiscal deficit by creating a positive environment to attract long term FDI flows for capacity build-up in core sectors which are considered critical to stimulate growth. So what are the expectations from the RBI Monetary Policy Review next week?

Expectations From The RBI Monetary Policy Review

Presently the repo rate, which is the rate at which banks borrow from RBI, stands at 8.5 percent. CRR, which is the percentage of deposits banks have to park with the apex bank, is at 4.75 per cent. RBI has many options based on various permutations and combinations to come up with pro-growth policy decisions without compromising on the inflation front. Mainly, it can either shift system liquidity from deficit to surplus or cut policy rates. A combination of both will be termed as aggressive and is difficult to get delivered so early. So what to expect?

- RBI cuts 25 bps in repo rate.
- RBI cuts 50 bps in CRR.
- RBI cuts 25 bps in both CRR and repo rate.

The last one is more sensible and positive than the other two because it gives a clear pro-growth message and an indication of further measures based on the clarity on downtrend in inflation and stability in rupee exchange rate. If this action results in growth without compromising on the inflation front, one can expect a 25 bps cut in the June, 2012 review as well. Keeping in mind the low IIP numbers announced earlier and yet to be announced March, 2012 inflation numbers (if don’t come inline), don’t be surprised if RBI again announces a 75 bps cut in CRR.

But the track record of RBI is not that promising and encouraging. Personally, I don’t expect more than a 25 bps rate cut in CRR or repo rate and that too in my opinion has been factored in after the announcement of low IIP numbers. The markets didn’t react negatively and anticipated the hike in rates and closed in green yesterday. The market momentum will continue only if something more than 25 bps cut is in the offering. Otherwise, it will be a no-event kind of a thing and it will be interesting to see the market reaction. And no announcement of any rate cut could spell doomsday scenario for the markets! It is the right time to act for RBI and prevent the worst in the making & get the economy back on track.

Now it’s your turn…..

Feel free to share your experience and thoughts in the comments area.

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