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Tuesday, 18 September 2012 00:00
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FM responds to RBI by vowing more reforms

A reforms-starved media may have made much of the government’s moves to allow FDI in multi-brand retail and the long-delayed decision to hike diesel prices as well as to limit LPG subsidies, but the country’s central bank saw them for what they were, and so refused to cut repo rates and contented itself by lowering CRR just 25 bps. While the Budget kept aside a mere R43,580 crore for fuel subsidies in FY13 against the likely R2,00,000 crore (based on fuel prices a week ago), the diesel/LPG moves have just reduced this to R1,80,000 crore. Compare the current 0% of GDP overall level of government savings—that’s the fiscal deficit plus the likely surplus of PSUs—with the 5% of GDP levels in 2008 which triggered off the savings-investment-led GDP boom, and you realise just how steep the path to higher GDP growth is. Even this would have been enough to give RBI pause—in its statement on Monday, it said it had front-loaded a 50 bps rate cut in April on expectations of fiscal policy support along with supply-side initiatives, but these did not materialise. While RBI appreciated last week’s reform moves as a significant contribution, it rightly said taking the economy to a higher path required “concerted policy action across a range of domains”.

But more than a lack of sufficient reforms, as RBI pointed out, there are significant other fears. QE3 and the ECB plan to buy unlimited amounts of bonds will bolster FII inflows, but will raise cost of oil—and therefore pressure on the deficit. So, if WPI is rising anyway—because of the hike in electricity prices some months ago—and ECB/QE3 will increase the pressure on prices, RBI wants to play safe. A CRR cut will also lower lending rates—SBI has already announced an ALCO meeting later today to decide the new rates—but this will be far below what a 25 bps repo cut would do. Also, given that the busy season is upon us, banks will be a bit cautious about lowering rates across the board. More so when, with NPAs rising, banks would be happy to pocket profits the CRR cut will give them, in order to get some cushion.

Which leaves us waiting for the October policy—finance minister Chidambaram reacted to RBI’s policy action by promising more policy measures and paths to fiscal correction before October 30. Much as pundits will praise RBI for copy-book anti-inflation moves, the economy has become frightening with investment stagnant and consumption growth down to a decadal low of 4%. In such a situation, since “pass-through to administered prices” will always “remain incomplete”—something RBI stressed upon on Monday while talking of last week’s fuel price hikes—there is no certainty we’ll see a rate cut in October either, more so since it’s unlikely there will be another round of raising oil prices. In which case, between the government and RBI, they’re setting the stage for a ratings downgrade. Hopefully the thought of the chaos this will result in will lead to the credible policy actions the finance minister has promised.


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