Public RelationsA balanced approach
Business Standard / New Delhi October 28, 2009, 0:01 IST
The feel-good factor is clearly returning to the markets, going by business confidence surveys and the financial market sentiment. But the recovery, though promising, remains fragile. Rural consumption will be hit by the worst monsoon in close to four decades, while international demand continues to languish, with the global economy still in contractionary mode.
Jan cement sales in high double-digit
As a result, RBI has taken a balanced approach in its monetary policy review. Its objective is to facilitate a holistic bounce-back from the crisis and sustained long-term growth. In the short term, it is critical to manage premature exuberance and contain inflationary expectations and asset bubbles.
The rural economy, which supports about half the country’s population, is hurt by an errant monsoon. Poor consumption demand from the rural sector will have a knock-on effect on industry and services sectors.
The policy has adopted an analytical stance towards the withdrawal of liquidity support measures instituted during the financial crisis. It holds no strong moves such as interest rate revisions. But RBI is looking to gradually withdraw the support extended during the peak of the financial crisis so to ensure there is no unnecessary liquidity sloshing around in the system that can stoke inflationary pressures.
But, this will be a tight-rope walk for RBI, as it does not want to thwart the nascent recovery. It may be too soon to withdraw support, but RBI has taken the first steps that state its intent. The move to restore the statutory liquidity ratio (SLR) to 25 per cent is a move that reflects the RBI’s intent without a strong impact on either liquidity or the recovery process.
Liquidity management and tackling potential asset inflation will remain focus areas. RBI has raised provisioning for loans on commercial real estate, which again shows its intent to take decisive action to prevent asset bubbles. With regulators’ concerns on asset bubbles now becoming a common agenda, it is likely there would be more action along these lines.
As Standard Chartered has mentioned before also, liquidity withdrawal would precede rate increases and, given the evidence of some excess liquidity seeping into asset markets, it assumes more importance. The next 2-3 quarters must be closely watched for how the economy — including the rural economy — shapes up. If growth numbers are stronger over the coming months, we could see stronger monetary action from RBI.