CARE: Expect liquidity to improve in Q1FY13, says RBI

CARE Ratings has come out with its report on impact of RBI's monetary policy statement 2012-13. The RBI expects liquidity conditions to improve in Q1 of 2012-13 but has assured that liquidity cushion would be enhanced if requirement for the same arises.

Current 'growth-inflation' dynamics have prompted the Reserve Bank of India (RBI) to reduce interest rates by 50 bps, bringing down the reference repo rate to 8.00% for the first time in two years. In order to contain inflation the RBI increased interest rates by 375 bps from 4.75% in March 2010 to 8.50% till date.

RBI's expectations:

1. Economic Growth:
Economic growth moderated to 6.1% in Q3 2011-12 from 8.3% for the corresponding quarter last fiscal. The slowdown in the economic activities was mainly on account of the lacklustre performance of the industrial sector which grew by 0.8% in Q3 2011-12. RBI expects economic activities to pick up pace with the estimated GDP to be around 7.3%.

2. Inflation:
Headline inflation that hovered over 9.0% for most of 2011 has been moderating since January 2012. WPI inflation stood at 6.9% by end of March 2012, in line with RBI’s expectations. The moderation was owing to sharp fall in core inflation. RBI expects inflation to slowdown to 6.5% in 2012-13.

3. Liquidity:
Liquidity conditions in the banking system have been tight since November 2011 with the banks borrowing approximately Rs. 1,22,785 crore from the RBI through the repo window. The RBI undertook several measures to pump funds into the banking system. The RBI increased its OMO purchases to Rs. 1,42,500 crore up to 30th March, 2012 compared with Rs. 78,800 crore up to 31st March, 2011. RBI also reduced the Cash Reserve Ratio (CRR) by 125 bps to 4.75%.

RBI expects liquidity conditions to improve in Q1 of 2012-13 but has assured that liquidity cushion would be enhanced if requirement for the same arises. It has increased the amount that can be accessed through the MSF by 1% point.

RBI estimates:
- Bank deposit to grow by 16%
- Bank non-food credit to increase by 17%
- Money supply growth by 15%

Non-food credit growth remained subdued throughout 2011-12 having decelerated from 22.1% at the beginning of the year to 15.4% by February 2012. However, bank credit picked up in March to 16.8%, higher than the RBI projection of 16%. The pick-up can be mainly attributed to increase in credit flow to agriculture and industry. Further, net bank credit to the Central government increased significantly to 15.7% in 2011-12 from 8.4% in the previous fiscal.

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