The Reserve Bank of India has hiked its cash reserve ratio by 75 bps to 5.75% as against 5% at its credit policy meet today. (100 basis points=1%) A CNBC-TV18 poll had forecasted a 50 bps CRR hike.
The move will be implemented in two stages. The first 50 bps hike will come into effect on February 13 while the next 25 bps hike will be effective February 27. The move will result in a mop-up of Rs 36,000 crore by February end.
The central bank has left unchanged the reverse repo, repo, and bank rate at 3.25%, 4.75%, and 6% respectively.
Rationale for the hike:
D Subbarao, Governor, RBI, says the confidence in recovery justifies reversing the expansionary policy. "The policy at current levels was more consistent with the crisis situation."
He acknowledged that the recovery yet to fully take hold. "Though the recovery is reassuring, it is still unbalanced and yet to be sufficiently broadbased. Our interest rate stance will balance price stability and support growth" Industrial production in November 2009 grew at 11.7%, the fastest in the last two years.
Expected Outcomes
- Reduction in excess liquidity will help anchor inflationary expectations.
- The recovery process will be supported without compromising price stability.
- The calibrated exit will align policy instruments with the current and evolving state of the economy.
Road ahead:
The governor says it necessary to carry forward the process of exit further. But was quick to add that strong anti-inflationary steps may undermine the recovery process. The Monetary Policy for 2010-11 will be announced on April 20.
GDP forecast:
It has revised its FY11 growth forecast of 7.5% from 6% earlier. The forecast assumes 0% agricultural growth and continued recovery in industry services. However, it says a possible spike in oil price is a risk to India's growth.
Inflation:
The March-end inflation forecast has been upped to 8.5% from 6.5%. The governor has promised to respond to inflation swiftly via policy adjustments. It expect inflation to moderate from July. "The monetary policy will contain inflationary perception to 4-4.5%. We retain our medium-term objective of 3% inflation," Subbarao stated.
Growth forecasts scaled lower:
Credit growth forecast has been lowered to 16% from 18%. Deposit growth expectation has also been downsized to 16% from 18%. M3 growth forecast has been revised to 16.5% from 17%
On liquidity:
RBI has hinted at more market stabilisation schemes. It expects large capital flows due to India's growth and on account of high global liquidity. "Capital flows could mean exchange rate appreciation and large domestic liquidity. The sharp rise in flows may complicate exchange rate management."
RBI cautions on fiscal deficit:
The policy says the biggest risk to economic management stems from fiscal deficit. "There is need for coordination in fiscal, monetary policy exits. A reversal of monetary stance is effective only if there is fiscal rollback."
Subbarao says large liquidity helped fiscal expansion in FY09, FY10. He added that liquidity is not available to accommodate fiscal expansion in FY11. "It is imperative for the government to return to fiscal consolidation."
These statements will further add to Finance Minister Pranab Mukherjee woes, who will be presenting the general Budget on February 26. He has the tough task of balancing growth as well as fiscal deficit concerns.
Source: CNBC-TV18Courtesy moneycontrol.com
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