Time for RBI to start tightening liquidity
Time for RBI to start tightening liquidity
That depends on their assessment whether the rebound in industrial production is likely to be sustained.
The 10.4% growth in industrial production in August is to a large extent due to the base effect, since Index of Industrial Production (IIP) growth in August 2008 was a low 1.7%.
In fact, even if the IIP remained at the same level as in July, year-on-year (y-o-y) growth in August IIP would have been as high as 9.8%. So the growth is not really as high as it seems.
Also Read Higher margin drives profit growth for Exide
ICICI Securities economist A. Prasanna points out, however, the fact that industrial activity is continuing to grow shows that it’s not just an inventory adjustment.
He says that while there are strong reasons for consumption to remain depressed in the US due to the debt overhang, those don’t apply to India.
That is borne out by the strong 22.3% y-o-y growth in consumer durables production.
Export growth too should pick up, on the back of a recovery in the West.
On the other hand, as HSBC senior economist Robert Prior-Wandesforde says, “Given the most severe drought in the north for several decades and the worst floods in the south for many a year, there are genuine concerns about the performance of agriculture and the knock-on effects weakness in this sector will have on consumer spending."
RBI governor D. Subbarao has been agonizing over whether he should hike rates, for fear of undermining growth.
But at least he need have no qualms about sucking out liquidity. As ABN Amro senior economist Gaurav Kapur points out, RBI has already achieved its objective of restoring confidence.
Liquidity is ample, as seen from the huge amounts parked by banks in reverse repos with RBI. Moreover, if the capital inflows continue, RBI may have to start buying dollars, adding to the liquidity.
In the circumstances, it’s time to start raising the cash reserve ratio.
This is unlikely to have much of an effect on the stock markets, seen from the fact that the market rallied on the rate hike by the Reserve Bank of Australia, interpreting it as another signal of a full-fledged recovery.
Write to us at marktomarket@livemint.com
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!