While banks should look at bringing down costs and not being alarmist, the markets, Rajan felt, should desist from misreading some of the policy measures taken by the RBI
It’s a season of surprises. RBI governor Raghuram Rajan wielded the carrot and stick in his first mid-quarter monetary policy review which is expected to reduce the cost of borrowing for banks by around `250 crore, or around three per cent.
Their short-term borrowing rates will come down as he has reduced the marginal standing facility (MSF) rate to 9.5 per cent from 10.25 per cent and the minimum daily maintenance of the cash reserve ratio (CRR) from 99 per cent of the requirement to 95 per cent. This, he said, was “generous”.
He, however, sprang a huge surprise on banks, the markets and financial pundits who went into a tizzy as he raised the repo rate by 25 basis points, or a quarter per cent, signalling higher interest rates in the long term. He dismissed the concern of bankers as the repo rate hike will have a mere .5 per cent effect on the entire borrowing of the banks and this is peanuts compared to the three per cent drop in their cost of borrowing.
One of the takeaways from former Chicago professor and IMF chief economist Rajan’s first policy statement is that banks and analysts have to change their mindset. While banks should look at bringing down costs and not being alarmist, the markets, he felt, should desist from misreading some of the policy measures taken by the RBI. For instance, one of the July decisions of his predecessor D. Subbarao involving how many dollars a person could take abroad as part of measures to stabilise the rupee was interpreted as bringing back capital controls. He said these are traps laid by analysts as the decision had not been about liberalisation or reversing liberalisation.
He cautioned that the postponement of the tapering of the quantitative easing by the US Fed was just a postponement and “we must use the time to create a bullet-proof national balance sheet and growth agenda, which creates confidence in citizens and investors alike”.
While asserting the RBI’s concern about inflation, particularly as measured by the consumer price index, Mr Rajan said the need to anchor inflation and inflation expectations has to be set against the fragile state of the industrial sector and urban demand, hence the rise in repo rate immediately.
On growth, Dr Rajan said it could pick up in the second half of the year but he was sceptical about inflation, which he said would remain high for the rest of the year in the absence of any appropriate policy response.
Dr Rajan said he preferred a neutral stance. The timing and direction of further easing or tightening of the exceptional measures, he said, would be contingent on exchange market stability.
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