Might help in assuring availability of long-term liquidity
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. Cant 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 action, in the absence of complementary measures, might just serve to stoke consumption (and hence inflation), but on balance, this might be a risk worth taking. But thats a separate story.
The focus here is on the 1 percentage point cut in the statutory liquidity ratio (SLR) from 24% of deposits to 23%. Make no mistake, SLR has become as much of the monetary policy repertoire as the repo rate and CRR, this is clearly an easing action, although probably not as potent as a CRR cut or even a repo rate cut. And this ties in with the earlier comment that a 50-basis-point repo rate cut (say), at this point, might have been ineffective in inducing banks to lower their lending rates.
But why should this have been cut now? As a reference, the SLR had been cut from 25% of deposits in December 2010 and then 2% of NDTL (net