The Reserve Bank of India’s (RBI) second quarter review of monetary policy is consistent with the central bank’s stance and is focused on controlling inflation. Like past policy announcements, two things have remained consistent in the second quarter policy announcement — inflation rate forecast going up and gross domestic product (GDP) growth forecast down.
This time, the inflation rate has been revised upwards to 7.5 per cent from 7 per cent earlier, and GDP growth forecast has been revised downwards to 5.8 per cent. While many countries may see a growth of 5.8 per cent in GDP as a respectable figure in the present recessionary times, the deceleration of economic activity in India is a concern. If growth stalls, it will obviously lead to a continuous fall in the rupee exchange rate. It also seems that RBI is fending off pressure from the finance ministry to cut the repo rate. Clearly, the ball (to improve investment trends) is in the finance ministry’s court.
The ministry will have to rely on the weapons in its arsenal, since monetary policy is not providing the support. At the same time, by cutting the Cash Reserve Ratio by 25 basis points, RBI is making sure that there is enough liquidity, at the cost of high inflation. The priority, at this time, has to be the revival of economic activity. The question that comes to mind is whether we are going to have a flurry of moves in the next few months from the finance ministry and the central bank.
CFO & Executive Director, Tata Consultancy Services