• CRR: 6% -> 5.5% (w.e.f. 28-1-2012)
• CRR cut will infuse Rs. 32,000 Cr liquidity in system
• Repo rate: 8.5% (unchanged)
• FY12 Growth projections revised from 7.6% to 7%
• Food inflation has come in control
Current policy stance is the result of contracting growth, fiscal fear and expected easing off of inflation in December.
RBI now identified that even after its anti-inflationary stance of increasing repo rates the inflation has not come in their comfort levels; it has now taken a route of adding liquidity action by cutting down the CRR from 6% to 5.5% as it saw that their prior steps curbed the growth of the country. This was expected and it will bring in good liquidity for banks and in turn in the economy. Some believe that RBI has done this with a view that Banks will be able to meet their Basel III standard’s tier I capital. So, its in favor of Banking sector.
This also entails a fear of increasing the dreaded inflation rate, which is already high because of falling rupee, increasing fiscal deficit, and volatile crude prices due to supply side issues. RBI indicates that inflation is no longer dependent on demand side pressures and pricing. It also has indicated that economy will again go into supply shortage driven inflationary trend, if investment related measures are not taken or are inhibited due to its nuances, be it formulation or execution. Take the case of new Companies Bill, it was supposed to be passed in 2011, now its 2012, it is nowhere near its final stage. But, due to policy changes for FDI in various sectors like Pharma & Retail, and FII investment being allowed directly into the Stock market, investment is expected to be attracted, which has improved the business sentiments will help us have resistance for downside of growth.
There will also be a very bad impact on exchange rate, since inflation will rise which will result in the further depreciation of Indian currency. So we have to manage the trade off between high growth and currency depreciation.
So, with this scenario of easing out of policies (FDI, FII and monetary), I expect inflation to ease out in second half of 2012 and growth to remain curbed in coming few months which is in line with one of the reports of Nomura's expectations of Indian Economy Outlook for 2012. It is expected that these headwinds are temporary for H1-FY 2012 and H2-FY 2012, is expected to be quite better.
This article is written by Harshad S Patil, a PGP Candidate (2010-2012) at IIM Raipur. He holds P.G. Diploma in Cyber Crime Management & B.Tech (I.T.) from VJTI, Mumbai.