RBI monetary policy: Inflation still in focus

The Reserve Bank of India announced its 2013-14 annual monetary policy last week, and as expected it stuck to its cautious stance, cutting the repo rate by just 0.25 percentage points to 7.25 percent. Will this move help the industry? In the past we have seen many times that banks usually don't show keenness in responding to such moves. As a result, lending rates remain unchanged for us. This time again I fear the same thing, especially considering the cut that is so meagre. The rate cut would not lead to lower lending rates, at least immediately.

For many, the rate cut is so miniscule that it will not help the economy. There were expectations that the apex bank would cut the repo rate at least by 50 bps and this could have been accompanied by a cut in CRR. But it didn't happen, despite the recent fall in inflation for March to a slower-than-expected 5.96 percent. In addition to the token interest rate cut, RBI has also made it clear that space for further monetary easing in 2013-14 remains very limited due to high inflation. So, unless the growth-inflation dynamic changes to some more positive direction in the coming months, nothing much could be expected.

However, RBI's point of view can't be ignored altogether. In its Macroeconomic and Monetary Developments Report, the bank has viewed that despite moderating headline inflation and demand-side pressures, inflation risks remain reflected in double-digit consumer price inflation (CPI), food supply constraints and suppressed inflation in energy segment, including diesel, coal and electricity. This is true but at the same time I think that RBI (as well as the Centre) should increasingly shift their focus more on growth, investment and savings than on inflation in the coming days.  

In the policy statement, the central bank's proposal to change three priority sector lending norms has grabbed my attention: first, increase in the loan limit for micro, small and medium enterprises (MSMEs) in the services sector to Rs 5 crore per borrower from Rs 2 crore earlier; second, increase the loan limit from Rs 1 crore to Rs 5 crore per borrower for bank loans to dealers/sellers of fertilisers, pesticides, seeds, cattle feed, poultry feed, agricultural implements and other inputs which are classified as indirect finance to agriculture; and finally , raise the limit on pledge loans (including against warehouse receipts) from the current limit of Rs 25 lakh to Rs 50 lakh. These are welcome steps.  

In addition, the apex bank has urged banks to strengthen their existing systems of monitoring credit growth to the sector and put in place a system-driven comprehensive performance management information system at every supervisory level. In addition, it is suggested that banks should put in place a system of e-tracking of MSE (micro and small enterprise) loan applications and monitor the loan application disposal process in banks, and they should monitor timely rehabilitation of sick MSE units and a format for the purpose will be provided to banks. These proposals sound promising.