The RBI policy actions for fiscal 2012-13 include repo rate cut of 75 bps, CRR (Cash Reserve Ratio) cut of 75 bps and SLR (statutory liquidity ratio) cut of 100 bps. In addition to policy rate cuts, the central bank has added Rs 130,000 crore of liquidity into the system through open market bond purchases.
On a daily basis, the RBI is lending around Rs 80,000 crore to Rs 100,000 crore to banks for their daily liquidity requirements. An impartial observer will look at the RBI’s actions throughout fiscal 2012-13 as pro-growth though the markets have been focused on the repo rate.
The total liquidity infusion by the RBI into the system in 2012-13 amounts to around Rs 2,45,000 crore excluding liquidity adjustment facility (LAF) lending. CRR cut of 75bps has released around Rs 55,000 crores of liquidity while the SLR cut of 100 bps has released around Rs 60,000 crores of liquidity into the system.
The RBI’s liquidity infusion coupled with 75 bps of repo rate cut at a time when inflation has been trending at 7.25-8.00 percent range is more than what one could ask for.
The government should take note of the RBI’s monetary easing while markets should be pleased with the latest round of 25 bps repo rate cut and 25 bps CRR cut.
The RBI’s monetary easing for 2012-13 is yet to show up in economic and monetary aggregates. GDP growth forecast by the central bank is down to 5.5 percent for 2012-13 as against earlier estimates of 5.8 percent and 6.5 percent. Bank credit growth at 16 percent levels as of January 2013 is lower than the 18.7 percent growth seen at the beginning of the fiscal while broad money supply (M3) growth is down to 13 percent from 13.7 percent levels. Bank deposit growth is down from 14.3 percent levels to 13.3 percent levels. However, the RBI’s easing has helped arrest a steep decline in growth and monetary aggregates.
The RBI has been calling reduction in CRR and SLR and bond purchases as liquidity boosting measures, which in effect it is. However, such measures are a direct form of monetary easing and when done in conjunction with repo rate cuts adds to the growth prospects of the economy. Equity and bond markets have benefitted from the monetary easing policies of the RBI with the Sensex and Nifty higher by 15 percent since April 2012 and benchmark 10-year bond yield down by 60 bps.
Looking ahead, will the RBI oblige markets by reducing repo rates further? The RBI’s guidance suggests that the central bank is more growth focused than inflation focused. Its assessment of inflation is more benign despite temporary effects of fuel price hike on headline inflation. The RBI has revised down March 2013 wholesale price inflation (WPI) to 6.8 percent from 7.5 percent projected earlier.
The central bank expects WPI to stay around 7 percent in the coming fiscal year. The RBI is likely to lower the repo rate by 25 bps in March 2013 if the government shows a lower fiscal deficit for fiscal 2013-14 in its budget and this repo rate cut will seal its efforts on growth push for this fiscal.
Equity and bond markets will welcome the 25 bps repo rate and CRR cuts. The Sensex and Nifty will head higher on positive budget expectations while bond yields will fall on expectations of lower fiscal deficit for 2013-14 and on expectations of a repo rate cut in March.
The Indian rupee has been a stark underperformer compared with equities and bonds. The rupee is down over 5 percent fiscal year to date largely on the back of a rising current account deficit that rose to record levels of 5.4 percent of GDP in the second quarter of this fiscal.
The rupee should start performing going forward on expectations of improved economic growth, stable inflation expectations and better government finances for the coming fiscal.
The RBI has done its bit for the economy and markets should sit up and take notice.
Arjun Parthasarathy is the Editor of www.investorsareidiots.com a web site for investors