Deep despair at RBI keeping its rates—repo, reverse repo and CRR—unchanged is not warranted. True, markets wanted cheering up. But if we look beyond the need for a pre-Diwali fix and assess the central bank’s policy stance now, it is clear there has been a change. That’s what matters because RBI doesn’t need scheduled policy announcements to cut rates or ease monetary policy. And even if one were to take the extreme short-term view and say that tanking markets needed ballast on Friday, the fact that Dow hadn’t risen and Asian stock markets were down would have made Indian markets depressed. In that situation, rate cuts by RBI may not have been able to lift market mood anyway. To come back to the substantive point, RBI’s inflation outlook has changed. As research by some economists, including columnists of this newspaper, have shown, point-to-point annualised, seasonally-adjusted inflation is around 7% now. That’s also the GDP deflator being used in India. Monetary policy should look forward, and the inflation outlook until around the third quarter of next fiscal indicates a declining trend. Global inflation outlook is also similar. The US producer price index shows negative inflation and commodity prices are softening. It is extremely unlikely, therefore, that RBI will be over-conservative on rates. Expect cuts sooner rather than later.
The other RBI action is on liquidity. Much has been done already. But, as has been argued in these columns, the usual playbook needs to be kept aside on this front. What RBI has to anticipate is that businesses will be looking not only at the current liquidity situation now but also at funds’ availability a few months ahead. If the signal on liquidity is not strong enough to meet anxiety about the future, businesses’ attempts to arrange much of tomorrow’s funding today may create a crunch again. Clearly laid-out plans to supply rupee and dollar liquidity backed by further CRR and SLR cuts would be the desired policy. Again, there’s no reason to think RBI won’t do this, given its recent responses. The only worry is that the central bank may stop over-compensating on liquidity. Over-compensation is needed now so that the feelings of financial fragility are replaced by confidence. How soon that replacement happens is RBI’s real test.