In addition, RBI has brought down the cash reserve ratio (CRR) of banks from 4.25 to 4 per cent of their net demand and time liabilities, effective the fortnight beginning February 9, which would inject Rs.18,000 crores into the banking system to ensure adequate flow of credit to productive sectors. RBI hopes these steps would encourage investment and support growth.

There is a decisive shift reflected in RBI’s Monetary Policy Stance in its Third Quarter Review of 2012-13 announced on January 29 of calibrating policy toward mitigating the risks to growth though, it says, the objective of containing inflation which prevailed in its growth-inflation dynamics is not to be de-emphasised. The policy stance is to provide an “appropriate interest rate environment to support growth as inflation risks moderate”.

Taking note of significant growth deceleration so far in the current year and overall economic activity remaining subdued as well as the more recent WPI trends, RBI has now revised its baseline projections for growth and inflation. Growth in 2012-13 is now estimated at 5.5 per cent (from the 5.8 per cent projected in October last) while notably, the headline inflation rate has been lowered to 6.8 per cent (from the 7.5 per cent earlier) for March 2013, though it would still be above RBI’s comfort level.

Unlike its relatively gloomy survey of macro-economic developments in the first three quarters of 2012-13 published a day earlier, with all the concerns—global and domestic, inflation, fiscal and current account deficits - the more qualitative Third Review Policy statement should give some cause for cheer for Government’s economic policy-makers. While not belittling those concerns, the Review looks more hopefully at the emerging trends such as moderation in core inflation (non-food manufactured products) and in supply-demand balances and global commodity price trends.

The macro-economic survey had noted that the “suppressed risks” to inflation, as fuel price revisions done and other commodity hikes impact on WPI, would surface in 2013/14. Also, there could be further corrections of under-priced administered items in the process of fiscal consolidation which would get reflected in WPI. Food inflation has remained unacceptably high but this has virtually been sidelined by the Finance Minister.

RBI assessment in the Survey was that high food inflation and any rise in global commodity prices like oil would get transmitted to the general price level and “constrain the scope for supportive monetary policy action”. But if all announced reform measures get “executed”, monetary policy would increasingly focus on growth revival, it had said.

Governor Subbarao in the Third Quarter Review Statement acknowledges the edging up of food inflation and its pushing up consumer price inflation in turn and says the monetary policy has to remain sensitive to conflicting pressures and attendant risks. However, he suggests that the policy shift to addressing growth risks should be seen in the context of a slowly improving global environment. In effect, he sees a “tipping point” having been reached in the balance of risks between growth and inflation. One hope is on a reduction in fiscal deficit bringing about a lasting reduction in inflation and lessening risks thereof.

It remains to be seen how far the much sought for interest rate cut by RBI would influence economic activity when expectations by India Inc and investors were for a 50 basis point reduction, to begin with. But the Governor has made cuts in both repo and CRR and together these should help to lower the interest rate and send a positive signal for investments, which had not shown any revival in the six months the Finance Minister has been flaunting UPA’s reforms spree.

According to the Reserve Bank, investment activity so far has been too low and there is also deceleration in consumption demand. There are also binding constraints in the availability of key raw materials and intermediates. And this gets on to widening the current account deficit.

Whatever the risks ahead, Dr Subbarao now feels it is critical to “arrest” the loss of growth momentum without endangering external stability. With the Third Review policy shift, RBI would now be seen to be driving monetary policy more in conjunction with fiscal and other measures in order to stem growth risks. This is a consummation devoutly wished for by Finance Minister Mr Chidambaram who had repeatedly spoken of fiscal and monetary policies moving in tandem to regain the growth momentum.

The Review says further reforms to raise productivity, improve competitiveness and manage the supply constraints, including augmenting energy availability, are crucial for raising the potential growth path in the medium-term. RBI has called for effective supply responses in respect of commodities under price pressures and for segments of the economy characterised by structural imbalances. In the absence of an effective supply response, inflationary pressures may return and persist with adverse implications for macroeconomic stability, it cautions.

It is debatable whether the current pause or negligible investment has much to do with the so-called interest rate burden which in real terms is not considered high. It may have much more to do with infrastructure gaps, procedural delays and lack of effective remedial measures. (IPA Service)