Perspective on the Credit Policy

Mr. Indranil Pan, Cheif Economist, Kotak Mahindra Bank

"In my opinion, RBI delivered a very balanced policy. As expected, they chose the calibrated path of a 25 bps cut in the Repo and the Reverse Repo rates as they wanted to avoid a repeat of April 2012 when the RBI had cut the Repo rate by 50 bps and then had to pause with surprises creeping in from the inflation side. On the other side, there is a clear acknowledgement from the RBI that demand side activity has remained low, growth has slowed below trend, probably needing the RBI to complement the reforms measures recently taken by the government. However, RBI continues to toe the cautious line on inflation, CAD risks and indicates that the room to cut rates could be extremely limited. The problem for the RBI is also that it has started its rate cutting cycle at a time when most other economies of the world are finished with the cycle, were on a pause, and now are looking forward to again hiking rates. Consequently, any aggressive rate cutting cycle could prove counterproductive as capital flows would be pared and the high CAD could then manifest into a currency depreciation bias, which in itself would again lead to inflation pressures. We now look for the RBI to reduce the Repo rate by a further 50 bps in the rest of CY2013".