FE Column : SLR cut expands repertoire of policy tools

RBI has developed a knack in bowling googlies at market analysts, using “gotcha” manoeuvres to confound. And, ex post, these measures are the sort that make you go “I should have thought of that and seen that coming”.

The usual policy measures were left unchanged; LAF repo rate and the cash reserve ratio (CRR) were not cut. And the Macroeconomic and Monetary Policy Review released just before the policy left little doubt on the reasoning why: “The Reserve Bank cut CRR by 125 basis points (bps) and front-loaded the policy rate reduction by cutting the repo rate by 50 bps in April 2012. It, however, paused at its mid-quarter review in June 2012 factoring in inflation persistence and macro-economic risks that emanated from lack of momentum in fiscal consolidation. Significantly, while there is slack in the economy, inflation remains persistent. Going forward, monetary policy space needs to be created through fiscal adjustment and structural measures to improve supply conditions and boost the investment climate, so that the revival is supported in a non-inflationary manner”. Can’t be more clear than that.

Was the policy stance defensible? Should RBI have done more? Disclaimer: I am of the persuasion that monetary easing was definitely an action needed, if not immediately in reducing cost of funds for loans, at least as a booster of sentiment to try and reverse the cycle of macroeconomic imbalances which has bedevilled us. There is, of course, a clear and present risk that such

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