Wait-and-watch policy prompted RBI’s monetary stance
The RBI in the current policy has maintained status quo in all key rates like CRR, Repo Rate and SLR with a clear accent on ensuring that growth momentum is sustained and reasonable levels of liquidly are maintained in the system.india Updated: Oct 24, 2008 21:51 IST
The Reserve Bank of India (RBI) in the current policy has maintained status quo in all key rates like CRR, Repo Rate and SLR with a clear accent on ensuring that growth momentum is sustained and reasonable levels of liquidly are maintained in the system. The policy document stating a close vigil on the entire financial system and the flexibility of enhancing liquidity if pressures persist clearly endorses the focus on aggressive liquidity management. The current status quo could also have been prompted by the need to wait and watch the impact of the earlier cuts.
However, the proactiveness demonstrated by the RBI through three consecutive reductions in CRR over the last one month, bringing CRR to 6.5 per cent and reduction in repo rate under the liquidity adjustment facility (LAF) of 100 basis points to 8 per cent further emphasises the focus towards alleviating liquidity pressures and, in particular, maintaining financial stability. The stance is expected to provide comfort to the markets and support expectations of future possible cuts if the liquidity situation persists.
A review of the overall policy stance for 2008-09 provides insights into the objective of striking a balance between, growth and inflation while ensuring that there is stability and order in the financial markets.
In line with this objective, until the July 2008 policy announcement, the focus was on containing inflationary pressures which had moved to over 12 per cent. However, with oil prices correcting, inflation seemingly peeking off and commodity prices correcting, sustaining growth momentum that is expected to witness moderation due to global financial pressures has begun to assume significance.
Over the past few months, the global situation has deteriorated significantly and international stock markets and money markets had been adversely affected, prompting central banks across the world towards synchronised policy initiatives aimed at infusing liquidity. The measures taken by RBI to augment domestic and forex liquidity in context of the global financial liquidity crunch is necessary and in line with the global policy stance.
RBI has a tough job at hand of effectively balancing growth, liquidity and inflation, and thereby steering India towards continuous growth. In the current context of the uncertain and unsettled global situation and its indirect impact on the domestic economy, close and continuous situation monitoring and resultant swift action is expected be RBI’s future plan of action.
(Nilesh Shah Deputy managing director, ICICI Prudential Asset Management Co)
First Published: Oct 24, 2008 21:49 IST