Should we really expect something different from the credit policy tomorrow, especially when RBI has the prerogative to intervene whenever it is required? RBI can help in two ways. The first is to infuse liquidity. But, then is liquidity a problem today? Not really as there is excess liquidity in the system which can be gauged by the fact that we have around Rs 1.2-1.4 lakh crore of money going into the daily reverse repo auctions with regularity. This situation is likely to prevail until such time that credit revives due to a turnaround in industrial growth, which will happen only after September.
What about government borrowings? True, it is higher this year at Rs 4.51 lakh crore, but RBI has already announced the calendar for government borrowing which is just Rs 31,000 crore more than what was announced earlier. Hence, there is no surprise element in terms of what is going to happen in the market. RBI has also been active with its OMO purchases which along with the de-sequestering of the MSS funds will take care of the borrowing programme. Therefore, CRR reduction does not make sense in the light of deposits growing at a higher rate than credit and the excess funds being locked up in GSecs.
Now, let us look at interest rates. Industry wants interest rates to come down while the saver will be affected negatively with high inflation (CPI) prevalent in the economy. There are two questions here. The first is whether lower interest rates are warranted, and the second is whether they will work in case they are induced. In terms of demand versus supply of funds, the tilt could be against supply, which means that rates could increase without intervention in terms of inaction. Further inflation is high with CPI inflation being close to 9%.
Further, evidence in the last 9 months has shown that while RBI has reduced the repo and reverse repo rates to 4.75% and 3.25% respectively, banks have not followed suit due to other reasons. This being the case, further reduction in rates even if announced by RBI is unlikely to have the desired result. In fact, RBI has tried to talk interest rates down literally but has only partly succeeded. Therefore, with the situation not warranting a CRR cut or a reduction in the repo/reverse repo rate, we should not expect anything dramatic from RBI. The other thought worth chewing over is whether RBI should take sides in supporting ?industry concerns? as against ?savers? concerns as the monetary authority. Ideally the market forces should decide rates and intervention should be warranted only when conditions are extreme, which is not the case today.
?The author is chief economist of NCDEX Ltd. These are his personal views