Inflation Priority in Growth-Inflation Dynamics - India Ratings

Views of Dr. Sunil Kumar Sinha ( Director - Public Finance ) & Dr. Devendra Kumar Pant ( Chief Economist & Head - Public Finance, India Ratings )
Monetary Policy Stance: In the evolving growth-inflation dynamics, RBI’s current stance clearly reflects its intention to anchor both - inflation as well inflationary expectations - in the economy. India Ratings & Research (Ind-Ra) believes that the key reason for such policy stance has been triggered by the reversal in the declining trajectory of WPI inflation, high retail inflation and the presence of suppressed inflation in the economy on account of recent depreciation in the INR.
Liquidity Tightening Measures Temporary: The RBI has again stated that the exceptional measure taken to tighten the liquidity in the recent past will be eased in a calibrated manner in response to the improvement in the external environment. Ind-Ra believes that this will not happen any time soon and will be contingent upon the improvement in the CAD and the prospect of funding CAD through more stable form of capital inflows.
Tapering off of QE: The decision by US Fed to hold the tapering off of QE, no doubt surprised many, but it certainly has not impressed RBI. It has correctly assessed that the tapering off of QE, if not now, is inevitable, and a country like India which is funding its CAD primarily with the help of volatile portfolio inflow cannot afford to overlook structural factors that are driving CAD.       
Growth to pick up H2 of FY14: According to RBI the current weakness in growth is due to sluggishness in both industrial and services sector activity. As a consequence growth is trailing below the potential leading to the gap between the actual and potential output widening. However, RBI is hopeful of growth reviving in the H2 led by improvement in agriculture and revival of exports. Ind-Ra also believes that growth could pick up from the Q3FY14 if in addition to the rural and export demand some the measures taken by the government particularly relating to large infrastructure projects gets implemented.
Money Market Rate to Decline: Tighter liquidity leading to operationalizing of MSF as the borrowing window under LAF resulted in higher rate of interest in the money market. Call money rate which was hovering between 7.2% and 7.5% in May 2013 increased to more than 10% between the middle of August 2013 and middle of September 2013. As the MSF rate has been reduce to 9.5 %, Ind-Ra expects the call money rate to fall and fluctuate between the LAF corridor of 6.5% and 9.5%.
No Relief to Consumer: With the repo rate going up, MSF rate coming down and the minimum daily maintenance of CRR declining to 95%, it is mixed bag for the banks so far as their lending  rates are concerned. However, Ind-Ra does not expect any cut in the base rate of the banks.  On the contrary, in select cases it might actually go up.
(Source: Manager – Corporate Communications and Investor Relations, India Ratings & Research -A Fitch Group Company)