RBI choses to be slow and steady
20 Apr 2010
By Vikram Kotak, chief investment officer, Birla Sun Life Insurance
The robust pick-up in economic activities coupled with high inflation so early in the economic cycle had made this the ripe time for RBI to accelerate the process of rate normalisation.
However, RBI displayed a slightly dovish stance and stayed behind the curve by hiking repo and reverse repo rates by only 25bps each against market expectation of 50bps.
The decision may have been driven by continued global uncertainties coupled with pressure from managing large government borrowing programme.
The CRR hike by 25bps could have been avoided due to the volatility in surplus liquidity in the system and expected pick up in credit demand due to rise in capex, higher oil prices increasing under-recoveries of down-stream oil companies and rising consumer demand.
RBI has focused on measures to increase credit flow to infrastructure sector, promote financial inclusion and further deepen and improve infrastructure for fixed income and forex markets.
Given the economic backdrop, currency, liquidity and inflation management is going to pose challenge for monetary policy in the current financial year.
The RBI has to strike an optimum balance between absorbing excess liquidity and hiking rates to curb inflation while ensuring that the economic growth, government borrowing programme and private and consumer credit demand is not hampered.
(See: Monetary policy: at the cross roads)
