RESERVE BANK OF INDIA - (RBI) - Third Quarter Review - of Monetary Policy 2012-13 - A SUMMARY & ANALYSIS

RESERVE BANK OF INDIA

Dr.D.Subbarao, Governor, RBI

Third Quarter Review

of Monetary Policy 2012-13

A SUMMARY

RBI today announced its monetary Policy measures as below :

Repo Rate

 It has been decided to  reduce the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 8.0 per cent to 7.75 per cent with immediate effect.

Reverse Repo Rate

 The reverse repo rate under the LAF, determined with a spread of 100 basis points below the repo rate, stands  adjusted to 6.75 per cent with immediate effect.

Marginal Standing Facility (MSF) Rate

 The Marginal Standing Facility (MSF) rate, determined with a spread of 100 basis points above the repo rate, stands adjusted to 8.75 per cent with immediate effect.

Bank Rate

 The Bank Rate stands adjusted to 8.75 per cent with immediate effect.

Cash Reserve Ratio

It has been decided to  reduce the cash reserve ratio (CRR) of scheduled banks by 25 basis points from 4.25 per cent to 4.0 per cent of their net demand and time liabilities (NDTL) effective the fortnight beginning February 9, 2013.

 As a result of this reduction in the CRR, around `180 billion of primary liquidity will be injected into the banking system.

Guidance

 With headline inflation likely to have peaked and non-food manufactured products inflation declining steadily over the last few months, there is an increasing likelihood of inflation remaining range-bound around current levels going into 2013-14. This provides space, albeit limited, for monetary policy to give greater emphasis to growth risks. The above policy guidance will, however, be conditioned by the evolving growth-inflation dynamic and the management of risks from twin deficits.

Expected Outcomes

 The policy actions and the guidance in this Statement given are expected to:

i)  support growth by encouraging investment;

ii) continue to anchor medium-term inflation expectations on the basis of a credible commitment to low and stable inflation; and

iii)  improve liquidity conditions to support credit flow.

Mid-Quarter Review of Monetary Policy 2012-13

 The next mid-quarter review of Monetary Policy for 2012-13 will be announced through a press release on Tuesday, March 19, 2013.

Monetary Policy 2013-14

The Monetary Policy for 2013-14 is scheduled on Friday, May 3, 2013.

COMMENTS :

RBI has, as always, provided adequate analysis of the economy, both domestic and international, which is a must-read, for any serious student / analyst of the Indian economy. RBI has also provided adequate indications on what needs to be done by the Government to contain Inflation, which provides adequate basis for reductions in Rate structure to support Growth in future.

While the Finance Ministry seems adequately conscious of its task and moving in that direction, Other Ministries do not seem to be adequately aware of their responsibility in containing inflation. 

There is need for concerted effort especially by the Food and Agriculture Ministries, both at the centre and in the states, to take adequate measures to augment supplies of Inflation prone commodities, impose some price controls on sensitive commodities, monitor price movements on other commodities, create storage facilities, ensure  non-hoarding of price sensitive commodities and so on.

Other Ministries like commerce and industry etc also need to examine their roles. Indian SMEs and cottage Industries seem to be facing too much competition from Cheap Imported products (especially the Chinese) and closing down their manufactures. Even large industries also are facing this heat. In recent past also, L&T chairman Mr. Naik was high lighting this unfair competition from the Chinese products. 

There is urgent need to levy  adequate duties on these cheap Chinese products, which are resulting in closing down of Indian SME /Cottage Industry products. If Indian production is suffering, mere monetary policy measures by RBI will not result in Growth adequately (though it helps). Government must look at measures on how to protect Indian manufactures against these cheaper imports. Thus, in respect of both food and non-food products, government action is urgently needed to contain inflation and promote growth.

This said, the RBI Policy stance announced today provides welcome relief  from the rigid stance of previous reviews. It is timely and reasonable. Similar decreases in such small measures would be appropriate on a periodical basis, so that, Banks can adjust their deposit-advance rates gradually. A sudden lowering of either rates is likely to upset the apple cart- for depositors especially. Gradual decrease will make them adjust to emerging situation more smoothly.

Thus, today’s, monetary Policy measures are definitely a Good step in the right direction. It will improve liquidity, improve profitability of Banks, and enable them to reduce the interest rates on loans – even if as token measure. One would expect Home loans and Auto loans to become cheaper, in view of the reductions so far effected in CRR and Repo Rate cut effected in the latest review. Consequently, borrowings by Corporates from Banks will improve and this will, in turn, result in production improvements in these two sectors, which will provide the basis, for improvement in other sectors as well. I do expect the manufacturing sector to get a boost by these Policy measures in the coming months.

All in all, RBI’s latest Policy measures should provide welcome relief to all sections of Industry and consumers.

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