Indranil Pan, chief economist, Kotak Mahindra Bank spoke with Jinsy Mathew on the RBI’s review of the Monetary Policy.


Was the Monetary Policy in line with your expectations?

Well no. We were expecting the Cash Reserve Ratio (CRR) and the key rates to remain unchanged. So the 50 basis point (bps) cut in the CRR comes as a surprise given our present inflation bias. Remember, the communication of the Reserve Bank of India (RBI) was also consistently biased towards the fact that CRR would only be used as a monetary policy tool rather than a liquidity tool.

So how do you read the CRR cut?

Going strictly by the Reserve Bank of India’s communication, CRR is now no more viewed only as a monetary tool. CRR was used in this policy as a tool to correct for the structural liquidity deficit, which could be hurting the credit flow to the productive sectors of the economy.

The GDP forecast has been cut from 7.6% to 7%. Do you think this is achievable?

The FY12 GDP at 7% is more of a realistic number and achievable in the current scenario. Our in-house estimate is around 6.7 %. So, it’s almost in line.

How soon do you see the rate cuts coming along?

We may see the first cuts in April starting with a 25 bps cut depending on the domestic and global situation.  However, given the current volatility in the global financial markets, one cannot totally rule out the rate cutting cycle starting in March 2012. 

The inflation target remains unchanged at 7%. Do you think there is an underlying worry as food inflation is projected to rise after March?

Post March, the inflation trajectory has to be relooked. My best guess is that the average inflation will be around 6-6.5% for FY2013 which continues to remain above the RBI’s comfort level of 4-4.5%. So the inflation segment will continue to remain sticky. 

The risks to inflation could also come global commodity prices and also currency depreciation. It is because of this factor that RBI refrained from inflation linked rate cuts immediately and might delay the rate cut till April 2012.

The RBI has acknowledged that the current account deficit will be a threat to stability. How do you see this being tackled?

Handling current account deficit is difficult given the high oil price which forms a major part of the deficit. Also, it remains to be seen how the recent increases in the customs duty in gold works out for the imports of gold and silver. Price elasticity of gold and silver will be relevant to determine the demand side story, rather than only a hike in the customs duty.

Incremental capital flows is one of the ways in bridging the deficit. However, there cannot be any immediate change on this front on account of global deleveraging with respect to emerging markets. The other way is to push up exports which is equally challenging.

And what about fiscal deficit consolidation?

Fiscal deficit consolidation is easier said than done as there are massive structural changes required. At the current juncture the concerned parties will be very hesitant due to the impending state elections and also due to the ongoing slowdown in the Indian economy. Any removal of fiscal accommodation in a slowdown phase would be totally unwarranted.