Straight from the Specialists
(Any opinions expressed here are those of the author and not of Reuters)
The Reserve Bank of India (RBI) wasn’t expected to do anything new at its policy review on Tuesday and it did exactly that. But the markets still reacted adversely. The stock market moved in consort with the rupee with the Sensex falling 245 points.
It is generally true that markets overreact, more so in India, partly because market sentiment is affected far too quickly. What evoked these sentiments was the undue concern expressed by RBI Governor Duvvuri Subbarao about external uncertainties, more so about quantitative easing by the U.S. Federal Reserve and food inflation in India.
The RBI has set new targets for itself with more or less defined priorities. The first is the rupee although the RBI is worried more about its volatility than the exchange rate. After all, the rupee has become weak because its purchasing power has shrunk to two-thirds of its level in the past five years. The second target is inflation, which stops the RBI from lowering the interest rate. Not that the central bank does not want to target GDP growth. It cut its growth forecast to 5.5 percent for the 2013-14 fiscal year.
The absence of policy change on Tuesday was as expected, since it had already taken steps this month to tighten market liquidity.
Banking is the backbone for growth in large economies such as India. Banks provide short-term finance to trade, industry and agriculture while also ensuring excess money is channelized into productive assets via deposits and financial intermediation.
Banks have to work under the stipulated policies of the central bank with respect to deposit mobilisation and lending for which they need to maintain minimum cash balances and government securities.