RBI Quarterly Review: Exit from easy money policy!

The clock has turned full circle. After consecutively increasing the liquidity in the system over the 6 month period from October 2008 to April 2009, RBI has finally given a signal for reversal of the easy money policy. Although most key rates (CRR, Bank Rate, REPO and Reverse REPO) have been held constant, a signal for reversal comes by way of hiking the SLR (Statutory Liquidity Ratio) to 25%, a rise of 100 basis points. The immediate impact of the hike will not be much, as the average SLR maintained by sceduled commercial banks is 27.6%, well above the target of 25%.

The main concern voiced by the RBI Governor is on the inflation front, RBI's March '10 projection for headline inflation has been hiked upwards to 6.5%, keeping in view the pressures from tightening food prices. We would have to wait for the winter crop to hit the markets by the end of calender 2009, to see the actual impact on food prices. But, RBI's stance is loud and clear: It values inflation management as its first and foremost task, while keeping the economic growth intact. There are some indirect measures in the policy which would take out the ecxess liquidity from the system;

• Bank's borrowing from the Money market, not considered for CRR calculation till now be taken into account for CRR calculation
• There has been a hike in provisioning requirements for loans given to Commercial Real estate developers. Provisions on standard assets hiked from 0.4% to 1%. NPA coverage ratio for commercial loans hiked to 70%.
• Export credit financing reduced to 15% from 50% earlier.
• RBI has also signalled a reduced money supply growth rate for the fiscal 09-10, indicating that a CRR hike is due in the next quarter.

The recent stock market rally which was fuelled by excessive liquidity seems to have been punctured by the RBI policy. It is an excellent step by RBI to take care of bubbles that could create a lot of trouble later if allowed to grow. On the other hand, the stock prices decline offers investors an opportunity to buy sound stocks for long term at reasonable levels. The long term survival of bull markets always depends on lower inflation levels.