By Ruma Dubey

RBI had more or less spelt out its intent yesterday itself when it had brought down the GDP forecast for FY13 from 7.5% to 6.3%.

And rightly so, today, as expected by almost all, RBI kept repo rates and CRR unchanged. It reduced the SLR from 24% to 23%, effective 11th August. Statutory Liquidity Ratio (SLR) is the amount a commercial bank needs to maintain in the form of cash, or gold or govt. approved securities (Bonds) before providing credit to its customers. RBI has done the perfect thing and going for a rate cut at this stage would have been foolish and impetuous.

RBI has been sending the message loud and clear for some time now to the Govt – get into action. But the Govt, deaf as usual, does not seem to be bothered, living in its fool’s paradise as the people of India suffer a nightmare. But today’s extremely hawkish statement by the RBI Governor, should hopefully wake up the comatose Govt. RBI’s stand in this policy – we have done our bit and now unless you (Govt) does what you are supposed to do, we will continue to sit on our hands.

System does not necessarily require rate cuts but the cut in SLR indicates that RBI is concerned about the liquidity and if this is improved, the road ahead should not be very bad. The cut in SLR is not good news for the bond market as it reduces the demand and especially for the Govt bonds, where around Rs.15,000 crore worth of bonds are coming up soon.

RBI had estimated 7.3% growth based on normal monsoon and industrial production pick up. But both have come to a naught and hence GDP estimate for the current fiscal has been revised downwards from 7.3% to 6.5%. Everyone was as such questioning the GDP estimate of 7.3% for FY13 given the poor monsoon, inflation and the consistently sticky IIP numbers. Thus for RBI to see this anomaly and accordingly bring down the forecast, is a bold and proactive move. It shows that unlike the rest of the Govt machinery, RBI is very much awake and alert, keeping a hawkish eye on the economy and ears to the ground.

Inflation remains extremely sticky. It was at 7.5% in April, rose to 7.6% in May and fell marginally to 7.3% in June 2012. Since then, the monsoon situation has worsened and growth has slowed down while inflation remains high, mainly on the back of high food inflation which was in double digits. Fuel moderated due to decline in non –administered prices. But given the volatile exchange rate movement, rising crude and increased input cost, the threat to high inflation will remain. And in this background, along with the uncertain global outlook, there was no way in which RBI could have cut rates. If growth slows down, inflation should also come down but what we are seeing now is that growth is down but inflation just does not let up, it just continues to grow. Till this gets corrected, RBI will make no move in rate cuts.

CRISIL has put out a report based on a poll of 200 companies, including 170 private sector companies. The report stated that the capex by Indian private sector firms will dip by 35% in current fiscal, the steepest so far compared to overall 14% dip in capex by Indian firms. Over 100 firms choose not to invest in new projects this year and majority cited policy logjam as one of the major factors responsible for the current slowdown in investments.  Hopefully, those in the Govt read this report and today’s statement by RBI too.

The market is disappointed now but life has to move on. All eyes will be on international events. There is expectation building in that QE3 could get announced in the coming Fed Reserve meet and ECB will also announce some sops when it meets on Thursday. For India, the Presidential elections are over and the market is expecting the FM to announce some sops. FDI in retail is the only visible sop we see on the horizon. 15^th August is the D-day – will we get freedom from policy paralysis?

There is no visibility on rate cuts in the immediate future. A small tinkering of 25 bps would make no material difference. Unless there are signs of inflation easing and the Govt waking up from its shameless slumber , RBI will not move to cut rates.  Thus till second half of current fiscal, we can rule out any big ticket rate cuts.

So let us wait and watch but for today, let us bask in the feeling of security that we have someone like Subbarao as the RBI Governor. As suggested by some our readers, maybe we should have Subbarao as our FM with support from former Railway Minister, Dinesh Trivedi. Yes, a complete change in leadership is what we need.