Fifth Bi-Monthly Monetary Policy: RBI needs pat on back for maintaining status quo
The “11th” paragraph of the paper is the most significant and puts the picture clearly in place.
“Liquidity conditions have eased considerably in Q3 of 2014-15 due to structural and frictional factors, as well as the fine tuning of the liquidity adjustment framework. With deposit mobilisation outpacing credit growth and currency demand remaining subdued in relation to past trends, banks are flush with funds, leading a number of banks to reduce deposit rates. The main frictional source of liquidity has been the large release of expenditure/transfers by the government. In view of abundant liquidity, banks’ recourse to the Reserve Bank for liquidity through net fixed and variable rate term and overnight repos and MSF declined from `803 billion, on average, in Q1 to `706 billion in Q2 and further to `476 billion in October-November. The use of export credit refinance also declined from 52.6 per cent of the limit in Q2 to 32.6 per cent in October-November. The revised liquidity management framework introduced in September, has helped the weighted average cut-off rates in the 14-day term repo auctions as well as in the overnight variable rate repo auctions to remain close to the repo rate, and the volatility of the weighted average call rate has fallen, apart from episodes of cash build-up ahead of Diwali holidays.”
Now, here is why efundsplus thinks there was no need for further easing and RBI stands reasonable in its stance.
For those who have been tracking the Indian economy throughout the last three quarters must be in knowledge of the fact that in the September quarter of the running fiscal yearGross Domestic Product (GDP) on the basis of existing prices just grew at 9.39 per cent while the supply of money in economy was much quick at 12.75 per cent. However, in the June quarter the supply of money was slower while GDP growth of higher.
This means due to surplus liquidity in economy there is no requirement of any rate cuts, as yet. A rate cut would only lead to more money flowing into economy which leads to high inflation.
Interestingly, the supply of money has only increased thereafter, even the RBI statement (paragraph mentioned above) addresses that.
This is widest since the June 2012 quarter.
For the same reason, that liquidity is high in our economy at present, RBI has sold bonds worth about Rs.30,000 crore to suck out liquidity from the system since mid-October through open market operations (OMO). RBI says “On an assessment of the permanent liquidity conditions, the Reserve Bank conducted OMO sales worth `401 billion during October to December so far.”
Arguing on th same lines, even yields on 10-year government bonds have shoot down by 66 basis points.
Short-term commercial paper and certificates of deposits (CDs) have also declined by as much as 40 basis points. A basis point is one-hundredth of a percentage point. So, isn’t RBI on the right side? What do you say?