InFocus
Annual monetary policy
Tightening the purse strings
Economists expect hike in interest rates in the current fiscal
The Reserve Bank of India (RBI) is due to remain measured and, in turn, ensuring that
unveil the annual monetary policy statement the reverse repo rate remains the operative
for the fiscal ending March 2011 (FY 2011) rate in FY 2011.
on 20 April 2010. The challenges facing the Sujan Hajra: The RBI is likely to go for at
central bank are managing the recovery as least another 25-bp hike in the repo and
well as maintain price stability with the faster- reverse repo rates in the policy meet on 20
than-expected recovery in industrial April 2010.
production and inflation. Capital Market’s Krupesh Thakkar: We expect a cumulative
Yogesh Kulkarni and Vijay Ghutukade, hike of at least 100 basis points (bps) in key
quizzed Manoranjan Sharma, Chief policy rates and 75 bps in CRR in the current
Economist and Deputy General Manager, fiscal, with expectation of a possible 25-bp
Canara Bank; Sumita Kale, Chief rise in the repo and reverse repo rate in the
Economist, Indicus Analytics; Indranil Pan, coming policy meet.
Chief Economist, Kotak Mahindra Bank; Is growing food inflation becoming an
Sujan Hajra, Chief Economist, Anand Rathi obstacle for growth?
Financial Services; and Krupesh Thakkar, Manoranjan Sharma: Monetary policy
Research Analyst, India Capital Markets, on can have only a limited impact on managing
the options for the central bank. Excerpts: food inflation.
Sumita Kale: Inflation eats away at
Higher inflation is raising anxiety. What household budgets, negating the positive
should the RBI do? impact of growth. The need to overhaul the
Manoranjan Sharma: The RBI should pricing policies, distribution strategies, and
continue with its stance of monetary raise productivity have all been well known
tightening throughout this calendar year. We for many years now. The political will to
see all rates — cash reserve ratio (CRR), make these changes is needed urgently now.
statutory liquidity ratio, repo and reverse Krupesh Thakkar: The short-term
repo — going steeply up by December 2010. interest rates on commercial paper and
The Raghuram Rajan Committee’s report on corporate deposits could go up in the near
the financial sector reforms made a case for term. So the yield curve would get steeper
inflation targeting as done in of the world, suggesting two things: economy growth for
including the US and the UK and the a longer period and high future inflation.
European Central Bank. This, in turn, will result in upward pressure
Sumita Kale: Monetary tightening has been on long-term rates to attract savings.
on the cards for a while now. The question of What are your expectations on inflation
timing and quantum of raise at each step over numbers amid the faster-than-expected
the year will depend on how the credit flows recovery in industrial production?
are increasing to the requisite sectors
and whether capex plans are being What do indicators foretell?
undertaken or not. Inflation has already
picked up in manufacturing items. So Macroeconomic signals
rates are warranted to influence 2009-10 2008-09
inflation expectations.
ACTUAL JAN APRIL ACTUAL JAN APRIL
Indranil Pan: The RBI could be
POLICY POLICY POLICY POLICY
increasing the reverse repo rate by
around 100 bps-150 bps in FY 2011 GDP ^7.2 7.5 6.0 6.7 *7.0
over the current 3.25%. Further, we WPI inflation (period-end) 8.5 4.0 1.2 #3.0
expect the CRR to rise by around 75 Non-food credit 16.9 16.0 20.0 17.8 24.0
bps-100 bps including a 50-bp hike Aggregate deposit 17.0 17.0 18.0 19.9 19.0
on 20 April 20 in FY 2011. In its effort
M3 money supply 16.7 16.5 17.0 18.6 19.0 16.5-17
to remove the monetary stimulus, the
Figures in %. ^ Advance Estimates (CSO) * With a downward bias, # Below
central bank’s actions are likely to
Apr 19 – May 02, 2010 CAPITAL MARKET
Manoranjan Sharma: Inflation would
continue to be at a high level for the next
two months but gradually fall because of
mutually reinforcing dynamics of good rabi
crop, lagged effect of monetary tightening
measures by the RBI and the base effect.
Sumita Kale: There has been a upsurge in
prices of commodities such as crude, steel
and rubber globally, not just in India, this
year. Clearly inflationary pressures cannot
be ruled out over the year. The Wholesale
Price Index estimates will trend down over
the year touching 5%-6% by December 2010.
Krupesh Thakkar: With better prospects
for rabi crop harvesting, normal monsoon
and stabilising global prices of commodities,
especially oil, we expect inflationary
pressures to ease.
Will the clamp-down on money supply
affect credit offtake?
Manoranjan Sharma :The RBI should
actively manage liquidity to ensure that credit
demands of productive sectors are adequately
met consistent with price stability and
maintain an interest rate environment
consistent with price and financial stability
and in support of the growth process.
Krupesh Thakkar::With improving
sentiments, both consumption and investment
demand have been picking up, resulting in credit
expansion from both bank and non-bank
sources. We expect bank credit to be above
20% in FY 2011, even after considering
government borrowing, as there is still enough
liquidity in the system.
There is a huge gap between short- and long-
term interest rate. How will rising
interest rates affect corporate
investment plans?
Manoranjan Sharma: Corporate
investment is a function of various inter-
related forces and factors. While interest
rate is certainly a significant factor, it is
by no means the only factor.
8-8.5 Where do you see the rupee?
Manoranjan Sharma: The rupee will
20.0 largely be range bound because of the
17.0 operation of the impossible trinity
(capital mobility, fixed exchange rates and
interest rate autonomy). However, there
is still some upside for the rupee. „
1