|RBI leaves it to government now|
|Wednesday, 18 April 2012 02:04|
Extra-large repo-cut to vie with policy paralysis
By cutting repo rates 50 bps instead of the widely-expected 25 bps, RBI has silenced all critics, including those within the government who have been arguing RBI is holding back growth; that once rates are cut, the supply response will kick in and help lower inflation rates as higher supply meets higher demand. Indeed, by raising the borrowing limit under the Marginal Standing Facility (MSF) from 1% to 2%, RBI has done its best to ensure banks pass on the rate cut since, in case of exigencies, banks can dip into their SLR holdings—SBI has already indicated it is meeting to see if the cuts can be passed on, and it is certain there will be government pressure on other banks, though the hike in deposit rates over the past few weeks will make a quick transmission difficult. But let’s be clear, with rates rising 375 bps since March 2010, a 50 bps cut will in itself do little to stimulate either investment or growth which has so rapidly collapsed—if the market rose 207 points yesterday, it was on the hope more rate cuts are in the offing.
Critics have panned RBI for cutting rates aggressively while inflation remains on boil—while highlighting the fall in inflation levels, RBI itself has underscored the usual pressure points like a deteriorating current account and pressure on the rupee, a slip in fiscal correction, a hike in petroleum prices, and more. So why did RBI go in for an aggressive rate cut while its policy statement says the likely increase in growth did “not leave much room for monetary policy easing without aggravating inflation risks”? While political considerations would have weighed in, it is certain a 50 bps cut will do more to stimulate investment than a 25 bps one.
Now that this has been done, RBI has very clearly put the ball back where it belongs: with the government. So, instead of making the usual noises about fiscal slippages, RBI has pointed out supply bottlenecks in infrastructure (and not the rate hikes), for instance, have played a large role in the fall in GDP growth—Tuesday’s decision by Coal India, our accompanying edit argues, ensures the coal bottleneck is back to where it was a few months ago, before the PMO directed CIL to sign fuel agreements with power suppliers! Similarly, as the RBI research study pointed out last week, the cost of ‘policy paralysis’ has been, for instance, a 35% reduction in FDI levels last year—similar parallels can be drawn for local investments. In other words, after delivering what the government wanted, RBI has put the government on notice, saying it cannot do anything more if the current account deficit is not fixed, if expenditure is not kept in check and if supply bottlenecks are not fixed. Even RBI’s critics can’t say it’s wrong.