India's shocking GDP: What are RBI's options on June18?

Moneycontrol Bureau

Latest data shows the Indian economy grew at a shocking 5.3% in the fourth quarter of the last fiscal, a level last seen 9 years ago. This takes the overall FY12 growth numbers to an abysmal, lower-than-expected 6.5%.  While the government is still putting on a brave face, the FY13 growth target of 7% may be a long shot.
The 9% growth everyone thumped chests about has become a hazy memory now. The government blames a slowdown in manufacturing and the tight monetary policy adopted by the RBI for this dramatic slowdown.
Among the factors that have contributed to the slowdown are the tight monetary policy that led to a significant rise in the interest costs and the weak global sentiments that affected growth in domestic private investment. The domestic investment sentiments may have been also affected by the environmental policy bottlenecks in the mining sector.
Brokerage have downgraded or revised downwards their estimates for FY13, Citi Bank 6.4%, Bank Of America Merryl Lynch 6.5%,  Goldman Sach 6.6%, Morgan Stanley 6.8%. However, chairman of PMEAC, Rangarajan believes GDP of 7.5% is still achievable.
All eyes are now on the RBI monetary policy review expected on June 18.
Saumitra Chaudhary, Member, PMEAC feels that softening of liquidity may ease the situation now. He points out that the Reserve Bank of India has many options to control liquidity and the most obvious one is an open market purchase. 
"They have been running down the FX assets. They can keep the balance sheet size same by buying government bonds for the market. That’s the way I would think would be the appropriate response, but I don’t have the entire information. So, the RBI, which has it, would take a more informed view than my very presumptive and very provisional view," he elaborates.
Shubhada Rao, Chief Economist, Yes Bank too agrees that it is time the central bank emphasize on the growth side now. Pointing out that easing monetary policy will revive growth once again, she is hoping for a repo cut of 50-75 basis points through FY13.
However, Sujan Hajra, Chief Economist, Anand Rathi Securities is not convinced that a mere rate cut will make any difference in the tight liquidity situation. He stresses that for transmission of loose monetary policy, the system needs liquidity surplus.
"So, CRR cut, OMO or perhaps a combination of both may give the push. I personally expect about Rs 2 lakh crore of OMO and Rs 1 lakh crore of CRR cut, that’s 1.5% and RBI infusing Rs 3 lakh crore of liquidity in the system," he adds. Nasrin Sultana nasrin.sultana@network18online.com