<div>In 2009, European Central Bank (ECB) President jean-Claude Trichet, defending the ECB’s monetary policy said “We have only one needle in our compass”. The Reserve Bank of India’s (RBI) persistence in not cutting policy interest rates in its second quarter review of monetary policy on 30 October appears to reflect the same feeling.<br /> </div><div>While most economists and experts appear to believe that the RBI’s near-exclusive focus on inflation control in formulating monetary policy is the right thing to do in the present circumstances, inflation itself shows no signs of coming down. In fact, the central bank’s policy statement revises the projected inflation at end-March 2013 upwards to 7.5 per cent from its earlier estimate of 7 per cent.<br /> </div><div>So here is the question: can a quarter percentage point (25 basis points, or bps) cut in the repo rate — the rate at which banks borrow from the RBI — make the inflation outlook much worse than it already is? Several experts argue that a rate cut could actually help kick-start capital expenditure (capex) spending and herald an economic growth revival. It is an argument that appears to fall on deaf ears, however. Instead, the RBI chose to cut the cash reserve ratio or CRR by 25 bps; that will release about Rs 17,500 crore into the banking system and ease the tight liquidity conditions; that might boost consumer spending during the festive season, but is unlikely to trigger significant capex on investment growth; it will however, improve banks’ net interest margins, that are important for improved earnings.<br /> </div><div>Reactions to the policy statement highlight the differences between the finance ministry and the central bank about the appropriate prescription to revive growth and the timing of policy action. The RBI believes more tangible evidence is necessary on tightening fiscal expenditure before monetary policy can be loosened; the finance minister believes his statements of intent are quite clear and unambiguous, so the RBI can actually cut rates.<br /> </div><div>To be fair, RBI Governor Duvvuri Subbarao did indicate the increased probability of a rate cut in the first quarter of 2013; the big question is, however: will that be too little too late?<br /><br /><span style="color: rgb(34, 34, 34); font-family: arial, sans-serif; font-size: 13px; line-height: normal; ">(This story was published in Businessworld Issue Dated 12-11-2012)</span><br /><br /> </div>
