How much can things change in the 45 days that fall between two monetary policy announcements? Well, a lot has transpired in this 1.5 month period. The US Fed has announced a fresh round of policy easing, popularly called as QE3. Plus the government has finally shown that it is taking reform measures seriously by announcing Foreign Direct Investment in a few sectors and raising diesel prices and reducing subsidy levels. Macro numbers in India however continue to remain poor. GDP growth is still below 6%, inflation remains high and Index of Industrial Production (IIP) growth is feeble.
Fearing an onslaught of higher commodity prices post the liquidity measures enacted by the Fed and the European Central Bank (ECB), the central bank has decided to keep rates unchanged. However, in order to boost liquidity, the RBI reduced the cash reserve ratio (CRR) by 0.25% to 4.5%. This will help inject Rs 170 bn into the system. This may please the SBI Chairman, who had a famous tussle over this ratio a few weeks earlier. A rate cut at this stage may have stoked inflation. As expected, the central bank has once again taken a conservative stance. The Reserve Bank of India (RBI) caution coupled with the government's new found resolve may just help macro numbers going forward.