June 3, 2014
RBI
Watch Monetary
Policy 2014-15
With the Modi led BJP government in power, there is now a
complete change – from gloom to euphoria - in the confidence of enterprises and
entrepreneurs in India’s economy. Confidence is the life blood of a market
oriented economy. So, output is expected to pick up, and the RBI is supporting
the supply side by reducing SLR (Statutory Liquidity Ratio – funds compulsorily
mandated to be invested in government securities) to 22.5% from 23%, and
thereby giving more funds in the hands of banks to lend.
But my understanding is that banks are already holding far
in excess of 23% (about 29%) under SLR! Why? This is because banks have felt it
safer to invest in government securities rather than lend in a weak economy.
So the RBI’s move is partly a signal to the private sector and
government.
On the rate side, RBI has made no change in its operating
tool of monetary policy: the repo rate. Why make a change? There is no case for
an increase or a reduction. Although output has been weak, inflation (Consumer
Price Inflation) continues to be above the RBI’s interim target of 8% (after
some months of decline, inflation has shown some signs of creeping up in March
and April, but this the RBI sees as seasonal). On the other hand, there are no
signs of a secular downtrend in inflation, and going ahead there could be
inflationary pressures due to a poor monsoon and some heating up of the economy
due to the new government.
To improve the transmission process of monetary policy and
reduce administrative burden, the RBI has chosen to gradually reduce sector
specific liquidity programmes. Hence the reduction in liquidity available under
the export refinance window to 32% from 50%, and its replacement by a special
term repo facility. The RBI today announced a special Rs 20,000 cr. variable
rate 28 day term repo as promised.
If inflation continues to be high but stable, and government
begins to put its house in order (making it easier for the government to agree
to borrowing at fully market determined rates), further reductions in SLR could
be RBI’s way of supporting growth.
(My suggestion is to read this blog with my
detailed analysis on April 16, 2014 of the first bi-monthly monetary policy
statement for 2014-15.)
