RBI MONETARY POLICY: MAKES SENSE AND MANIFESTS SENSIBILITY
Shedding 500 points is big enough to be noticed by every Tom, Dick and Harry of India Inc. Uninformed investors, herd mentality and FIIs ready to make a quick buck were the major factors for the 2% fall in our domestic indices. The usual talk was, ‘Arre market gir gayi suna, kya kare monetary policy mein,”. And the blame goes to the central bank and the bankers. As per the market analysis, FII traders and speculators were taken aback with just a 25 basis cut, but who asked them to take positions on the basis of the budget speech. The market has been going up since 29th February by some 10% with an expectation of 50 basis points cut in repo rate. I think by this time, they should have some idea about Mr. Rajan, his usual style is to do the unexpected. Till now 150 basis points have been cut and only half of it has been transmitted and thus the need arose for liquidity measures which have been announced and consequently both our indices tumbled like Jack and Jill, of course supported by weak crude and poor show by European markets.
Now let’s go to the cherry on the cake, I mean liquidity measures. Everybody wants a lower lending rate on every possible kind of loan, but when the central bank actually tries to transmit it in reality, we have a free fall. The crux of the matter is that the FIIs don’t care a fig about our lending or borrowing rates or for that matter about the financial health of our banks. What they want is a higher interest rate cut driving financial sector stocks higher to amplify their portfolios. So measures like reducing the minimum daily maintenance of the CRR from 95 per cent to 90 per cent does not matter to them. RBI initiated other path breaking measures such as narrowing policy rate corridor from +/-100 basis points (bps) to +/- 50 bps by reducing the MSF rate by 75 basis points and increasing the reverse repo rate by 25 basis points now at 6%, which will remove distortions and bring about better alignment between the weighted average call rate (WACR) and the policy repo rate. Last but not the least, the central bank will progressively lower the average ex ante liquidity deficit in the system from one per cent of NDTL to a position closer to neutrality which is one of the most crucial decisions taken by the governor resolving the long tussle for liquidity between the RBI and banks.
All these measures will be extremely fruitful in the long run, as impediments for rate cut transmission and liquidity needs of the banking sector have been addressed. So instead of sulking, let’s get back to work. What ever is done by the central bank was due for a long time and made eminent sense in the present uncertain global scenario. Our foremost concern should be to strengthen our financial sector and this is what is being done in the recent monetary policy. For rational informed investors, the RBI monetary policy has made both sense and sensibility, for the rest only luck can help them.