Repo Rate Reduced to 8.0% and Other Monetary Policy Highlights

by Manshu on April 17, 2012

in Economy

After an upward march for the last 3 years, the RBI has decided to cut the repo rate by 0.50% and bring it down to 8.0% from the existing 8.5%.

This is a bigger change than the 0.25% that was being talked about before the release, but it doesn’t indicate that RBI is in any sort of hurry to bring down the rates.

In their 2012 – 13 Monetary Policy, they have specifically stated that the trend rate of GDP growth has come down from former years, and that’s largely due to structural issues. They can’t ease rates a lot more without risking the rise of inflation, and the statement shows that the RBI is still very concerned about inflation getting out of hand again.

RBI Reduces Repo Rate to 8 Percent

RBI Reduces Repo Rate to 8 Percent

There were several interesting things that came out from the report and they were all largely comments on the deteriorating state of the Indian economy.

None of this is new, and you would have heard about this before as well. The whole report is a quick read and I’m listing down some points that caught my attention.

Inflation in protein based items

This is something that has featured in RBI reports for at least a couple of years now, and it comes up yet again. They see high inflation in protein based foods like eggs, fish, meat and milk which show a structural imbalance between demand and supply in these items.

General concern about inflation

Though inflation is not hitting headlines as it used to a year or two ago, RBI is still clearly concerned about it especially because the modest decline seen recently seems to be reversing course.

Worsening Domestic Numbers

I see a lot of worsening numbers related to the domestic economy in the RBI report. IIP has moderated taking GDP growth down, capital formation has contracted, private demand has grown by just 2%, Manufacturing Purchasing Manager’s Index has moderated, corporate sales are up but profits are down, liquidity is tight, current account deficit is higher, and forex reserves have depleted.

GDP Growth Projection

They project GDP growth of 7.3% which is lot higher than what we see today and the rationale for that is industry is expected to perform better this year as leading IIP indicators are positive, and the global economy also looking better than last time.

Not enough room for rate cuts

Although they have cut repo more than expected today, they say that there isn’t much room for further rate cut without risking the rise of inflation again, and the moderation in growth has been due to supply bottlenecks in areas like infrastructure, energy etc.

Unsustainable Current Account Deficit for last quarter

This is straight from the report:

“For the quarter ended December 2011, the CAD was very high at 4.3 per cent of GDP. This level is unsustainable and needs to be contained. With global capital flows to emerging markets projected at lower levels in 2012, financing of the CAD will continue to pose a major challenge.”

Very strongly worded, and perhaps a warning to the political class to do something about subsidies, policy inaction and all the other factors that are constraining growth from taking off and are also drying up funds from abroad.

These were just some of the things that caught my eye, and you can breeze through the report fairly quickly, and you should definitely give it a read as well.

{ 7 comments… read them below or add one }

Aditya April 17, 2012 at 4:08 pm

Hi Manshu, is it possible to have a multi-functional graph with the changes in repo-rate along with the inflation rates (whether the total inflation or that of protein-based foods)? I wonder whether RBI’s changes in the rates earlier did manage to control the inflation rate– I guess you could even add a phase difference of a few months between the two functions to get the effect.

Reply

Manshu April 17, 2012 at 8:12 pm

It is possible though I’m not sure how long it will take and how to structure it. I will give it a try though.

Reply

Aditya April 18, 2012 at 7:28 am

Cool, thanks. Inflation is likely to depend on multidimensional factors, but I wonder how effective these economic instruments are to reign it.

Reply

bemoneyaware April 17, 2012 at 7:11 pm

Great summary of the report and pretty quick too!

Reply

Manshu April 17, 2012 at 8:12 pm

Thanks!

Reply

Ramesh April 17, 2012 at 7:59 pm

Great! Will it affect Bank Deposit Rates also, if so, how soon?

Reply

Manshu April 17, 2012 at 8:13 pm

Yes, it will and that too fairly quickly. We should see some changes in the coming week if not sooner.

Reply

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