Cheap money days are over

The Reserve Bank of India signalled strongly on Friday that its 15-month-long cheap money stance was over, and backed it up with a clear call to the Centre that it must begin rolling back tax breaks and other stimulus measures to shift the focus from an economic recovery to fiscal discipline.

The Reserve Bank of India signalled strongly on Friday that its 15-month-long cheap money stance was over, and backed it up with a clear call to the Centre that it must begin rolling back tax breaks and other stimulus measures to shift the focus from an economic recovery to fiscal discipline.

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But it left policy rates unchanged.

RBI governor Duvvuri Subbarao increased the cash reserve ratio (CRR) – the quantum of deposits that banks have to park with the central bank-- by 0.75 percentage points, going beyond expections of a 0.50 percentage point hike. Some saw that as a hawkish stance.

The move would suck Rs 36,000 crore from the banking system.

Bankers saw no immediate threat to availability of loans. But analysts said banks with surplus liquidity would not be hit but others may have to revise their lending rates.

Subbarao said his focus is on maintaining “an interest rate environment consistent with price stability and financial stability, and in support of the growth process” and indicated he was in a tight corner.

“Draining of liquidity is laying the groundwork for policy rate hikes and excessive capital flows. A delayed exit from fiscal stimulus could pose challenges to liquidity management,” said Anubhuti Sahay, an economist at Standard Chartered Bank.

Industry bodies seemed happy.

“The RBI has performed a fine balancing act by not increasing policy rates,” said Chandrajit Banerjee, Director General, Confederation of Indian Industry.

Assocham said RBI had indicated it would gradually withdraw the liberal monetary policy stance.