After a hiatus of pessimism, a string of positive news flow has gradually re-emerged on the macroeconomic front of the Indian origin. Certainly, a ray of hope is visible at the fag end of the tunnel that leads India back to its growth path as a leading emerging market economy.
The harsh monetary tightening spree by the RBI has somewhat stifled the money flow and pent-up demand from the consumers to control the headline inflation in the economy – especially, food inflation, which has softened considerably on the back of record kharif output and satisfactory progress in Rabi sowing.
In a bid to further fine-tune the system, the central bank has cut the CRR by 0.5% to mark a shift in its policy from fighting inflation to reviving growth. The RBI has reduced the CRR of scheduled banks by 50 basis points from 6% to 5.5% of their net demand and time liabilities.
However, the policy repo rate and reverse repo rate under the liquidity adjustment facility has been retained at 8.5% and 7.5% respectively, in the third quarter review of monetary policy.
The widely anticipated CRR cut by the RBI will attempt to ease structural pressures on liquidity in the system. Furthermore, this is the first indication by the central banker that the cycle of rate increases has peaked and further actions were likely to reverse the cycle.
However, the RBI has left a cautionary note in its policy paper saying:
“Based on the current inflation trajectory, including consideration of suppressed inflation, it is premature to begin reducing the policy rate. The reduction in the policy rate will be conditioned by signs of sustainable moderation in inflation.”
The country’s apex banker has also revised downwards India’s projected GDP growth from 7.6% in second quarter review of monetary policy in October to 7% in the third quarter review.
This tone down of growth expectations is based on significant downside risks such as faltering global growth prospects, weak domestic industrial growth, slowdown in investment activity and the likelihood of the decelerating industrial production impacting service sector growth as well.
Amidst all these negatives, there is shining armour in the cupboard – with the Indian Rupee climbing past the 50-mark to hit a 10-week high against a US dollar. This surge in rupee value can be attributed to the RBI intervention to stimulate capital flows and curb speculation, consistent with its policy of preventing disruptive forex movements.
Hopefully, Indian economy laps on to these positive news in upcoming times; and form a base for a sustainable, resounding growth model with a mandate to balance both pricing and growth equations.