RBI’s Closed-Eye Bonanza?

In RBI’s annual monetary policy review meeting, a surprise was unfolded by the central bank:

·         With Repo Rate cut by 50 basis points (bps) after a long time.

·         Reverse Repo and Marginal Standing Facility was placed above and below by 100 bps.

·         MSP now stands at 2 percent of their outstanding Net Demand and Time Liabilities (NDTL) from 1 percent before.

These major changes in the monetary policy really boosts RBI’s expected GDP growth rate of 7.3% in 2012-13 but the point to be contemplated upon is: Will this estimation turn out to be a reality? Many experts believe that monetary easing alone would not be sufficient to boost the growth projection. And it is absolutely correct because until our Fiscal deficit and Current Account deficit is not tamed the projected momentum is an elusive dream. This clearly points out the policy paralysis in which our system is currently entangled. Even in the recent budget there has not been an impressive reform to boost our economic condition.

On the other hand thought with persistent rate hikes by the RBI it has clearly succeeded in bringing the inflation under control but still there are Inflationary pressures, especially food inflation, have regained momentum and the upside risks have risen. In coming months, consumer goods and services inflation would also be adversely impacted due to indirect tax increases. Inflation declined temporarily after November 2011, but has remained stubborn at 6.9 per cent in the fourth quarter of 2011-12. Finally, coal and electricity prices are already being revised upwards and the process is likely to continue throughout the year. The wage-price spiral in India has strengthened since last year, because wages in the rural economy now rise in line with inflation, with inflation-linked wages under Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) setting the floor. All these inflationary alarming bells can get louder if ignored.

External factors like demand from the Rest of the world has also been bearish, rising fuel prices and the world economic volatility has also applied brakes on the exports growth of our country and putting appreciative pressure on the rupee. Coupled with all these factors the slowdown in the investment has also been attributed for this tepid growth rate. Hence, for growth to revive, the investment climate, supported by appropriate policy reforms, will have to improve.

So it can be concluded that though RBI did its part by easing up of the monetary policy but still it cannot alone provide the required impetus to the economic momentum, it definitely needs government’s support to push the reforms ahead for prosperity and economic stability.