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No non-event, this
- In its mid-quarter monetary policy review on December 16, the Reserve Bank of India did not change the policy interest rates, the repo and the reverse repo rates. They remain unchanged at 8.5 per cent and 7.5 per cent, respectively. Nor did it tinker with the Cash Reserve Ratio, which stays at 6 per cent.
- The repo rate has emerged as the key reference rate. The reverse repo is pegged at one percentage point below it. Those significant changes were introduced in the annual policy statement of May 3, which also saw the introduction of the marginal standing facility whose rate is fixed at one percentage point above the repo rate.
- It ought to be mentioned here that a monetary policy announcement does not cause the same level of excitement, which, say, a budget announcement does.
- Until recently, monetary policy issues were presumed to interest bankers (to whom it is generally communicated in the first instance) rather than the common man.
- But the paradigm is surely but steadily changing. Ordinary citizens develop a vested interest — they may own a house bought with a bank loan or financed their children's education through an educational loan.
- The latest mid-quarter review is one of the eight policy statements by the RBI in a year. The increased frequency — one every 45 days — helps the central bank keep in constant contact with the financial markets.
- However, one outcome flowing from the frequent announcements is that the monetary policy statements have become predictable.
- There are pros and cons in such an approach. On the plus side, there is greater transparency as well as continuity in policy. Important issues discussed just 45 days ago will not be forgotten.
- The flip side, of course, is that the central bank probably loses its surprise element when it wants to take the market participants by surprise.
- Inflation continues to be a main worry, although the RBI is hopeful of containing it within its projected target of 7 per cent by March, 2012.
- “While inflation remains on its projected trajectory, downside risks to growth have clearly increased,'' the RBI said.
Challenges galore
- It has even been decided by members of the Organization of Petroleum Exporting Countries to obviate a rise in world crude prices by maintaining crude production even with the likelihood of Libya and Iran resuming oil exports tangibly.
- Since the prospects for India's foreign trade will be adversely affected by these developments and forex outflows also have had a complicating effect on account of the slump in bourses and the dismal performance of the industrial sector, there has been a virtual raid on the rupee and its parity with the dollar has slumped to nearly 54.29 from around.45 in August this year or a drop of 20 per cent.
- The Union Finance Ministry also is in an awkward situation with fears of significant shortfall in tax receipts both direct and indirect and the necessity to overcome the loss in capital receipts on account of the inability of the exchequer to realise budgeted receipts under the disinvestment programme.
- The borrowing programme through market loans has thus to be intensified and new loans having higher coupon rates will have to be issued.
- Alternatively there may be an attempt to raise foreign currency loans as the maturing foreign securities have also to be redeemed.
- The Union Finance Ministry also can take a hopeful view of the prospects for the coming months in 2012-13 as the bumper crops raised in 2010-11 will be resulting in an embarrassing surplus. It will be hard to prevent an uncomfortable rise in buffer stocks without a step-up in exports as well as a sizable increase in internal off take in domestic market.
- The industrial sector has not, of course, acquitted itself creditably due to various adverse factors.
- For the whole year the growth may be only 5.3 per cent against 8 per cent.
- The services sector has been consistently performing well manner and the objective should be to utilise the still sound fundamentals of the economy for providing sinews for achieving a growth of 8.5 per cent or 9 per cent in 2012-13.
