Comments on RBI policy from Mr. Vikram Kotak, Chief Investment Officer – Birla Sun Life Insurance Co. Ltd

Contrary to last year's aggressive rate reductions, RBI has chosen to keep rates unchanged as it is too early in the economic recovery cycle to consider tightening monetary policy, a further easing also seems to be out of question as sharp rise in soft commodities can add to food inflation.

I think rate hike is far away due to two reasons:

1. Global interest rate outlook is still dovish.

2. It will undo the benefits of fiscal and monetary stimulus packages as economy is not back in action yet.

The RBI has revised up its own forecast of inflation to 5% from 4%. However, as the RBI pointed out in its statement, the main priority at the moment is to "actively manage liquidity to avoid government borrowing from crowding out private sector demand". In effect that suggests liquidity will remain ample until the economic recovery has reached what might be termed a self-sustaining phase.

RBI looks more optimistic on growth and their stance has become more positive i.e. 6% GDP growth with an upward bias. RBI is turning positive on growth but maintains that an uptrend in the growth momentum is unlikely before the middle of 2009-10.

RBI expects fiscal and monetary stimulus measures to boost domestic demand. Services sector may experience the drag of sluggish external demand and the lagged adverse impact of the weak industrial growth. RBI sees increasing downside risks to agricultural production.

Summary of Policy stance:

1. Manage liquidity actively so that the credit demand of the Government is met while ensuring the flow of credit to the private sector at viable rates.

2. Keep a vigil on the trends and signals of inflation, and be prepared to respond quickly and effectively through policy adjustments.

3. Maintain a monetary and interest rate regime consistent with price stability and financial stability supportive of returning the economy to the high growth trajectory.

Source : Equity Bulls

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