Expectations in RBI credit policy on 29 Jan 2010

Expectations in credit policy on 29 Jan 2010

RBI Credit policy review scheduled on 29th Jan 2010. Exceptions and its effects speculation.

Introduction
In credit policy RBI discuss about Macro Economic scenario like GDP, inflation, financial markets and monitory policy measure like cash rate, liquidity, etc.

Monitory Policy
In monitory policy RBI will declare the CRR, SLR, REPO, reverse REPO and bank rates. These are the instruments to control the liquidity, growth and inflation in a macro economic scenario. There are many theories, principles and guidance which say how these are act in interrelation and how one can be control with increase and decrease in liquidity in the system.

RBI takes exception for the priority sector allocations guidance to the banks.


Macro view
Main coverage here is with respect to the policy measure with the high inflation scenario with monitory policy. With December WPI inflation touching 7.31%, growth for the Q2 2009 has came above expectation around 7.9% beating the expectations of all. The major part of inflation is contributed by the food inflation which is above 16% year on year (yoy) (there is theory where its due to demand and supply mismatch but if looked in there are many political and structural policy issues which are discouraging the farmers not to produce where climatic conditions are minor part of it I don't want to talk about it as many will oppose my views as they like the present system)


Expecting few policy stance
These are few expectations and indications to me frm RBI policy stance. My expectation and views on the policy are

1. To leave key rates like CRR, repo reverse repo and bank rates untouched and let the inflation be high and to fuel the growth which can be govt. policy to create demand for the upcoming PSU public issues (both IPO and FPO) and also to get the fiscal deficit under control by issue of bonds at a cheap rate with growing concern about fiscal deficit for FY10.

2. Just CRR hike by nominal of 25 basis points. In this scenario there is no effect on any of the key rates and no sign to control the growing inflation just by saying its demand-supply mismatch lead inflation. This will clearly give a non proactive and cheap rates to fuel more growth and more speculative bubble formation which will become hard to tackle in near future due to worries of bubble explosion. This show a lean and leaky control on the macro economic condition, which will be tuff to control with the expected WPI inflation in coming future which can be double digit.

3. Rate tightening indication but not an aggressive can be a CRR hike of 150 basis points and repo and reverse repo rate hike by 50 to 100 basis points. This gives indication the sustained economic growth has come back on track and now its time to control inflation which was on back burner until some time due to bad economic conditions. It sends out a signal the RBI is getting ready in its conservative policy to control the key macro economy.

4. Rate tightening by CRR increase from 100 to 300 basis points and REPO and reverse REPO rate hike by 100 to 150 basis points. This is an indication that economic growth is back on track and there is slow exit from the loose policy stand. Soon government will systematically exit from the stimulus which it used to put back economy back on track.

From the above possibilities 1 and 2 can be proved blunder mistake in coming future and indicate that RBI is not yet confident on the current growth to be sustainable and it can weaken the current sentiment which can pull back economy of track if sentiment is strong.

But from possibility 3 and 4 it will signal that there is a policy confidence that economic growth is back on track and now RBI policy is to make sure sustainable growth with inflation under control.

RBI stand and economic confidence will be revealed by RBI on January 29 2010 in the regular policy review. Hope it will take appropriate steps to increase confidence in economy when west is saying it is seeing fragile growth. While western think tank is mulling that its time for second stimulus to sustain the economic growth in developed economy.

This is just a speculation and purely my views on speculation.