The Monetary Policy Committee (MPC) has opted to hold the repo rate at 6%, with one member voting to raise it by a quarter of a percentage point right now. Inflation is expected to pick up in the coming quarters, as is growth.
With global growth revival, consequent reversal of extraeasy monetary policy by advanced economy central banks and resultant volatility in stock markets around the world in anticipation of liquidity drying up, India faces macro-financial risks. Coordinated growth across the US, Europe and Japan is likely to keep energy demand and prices buoyant. Higher policy rates by the Fed, which has promised three rate hikes this year, could see foreign capital leave emerging markets such as India, putting downward pressure on their currencies.
Higher dollar prices of crude and a rupee under pressure together pose a threat of inflation, quite apart from the government’s fiscal slippage and plan to raise procurement prices for farmers. There is little room to reduce rates. It is welcome that the central bank is gearing up for greater exchange-rate volatility.
It has decided to ease foreign exchange hedging in India for non-residents and liberalised the limit for exchange-traded currency derivatives for residents and non-residents, raising it from $15 million to $100 million, without having to show underlying exposure.
The deeper and broader the market for risk, the better the opportunity to hedge against it. This is a welcome regulatory move. The only qualification is that the expertise needed to operate in this market is not abundant and companies must exercise caution.
It is tempting to welcome the liberalisation of credit norms for small and medium enterprises that are registered for GST; but the sad reality is that banks account for a meagre fraction of SME credit. Liberalisation of existing.
credit links is not enough. SMEs need new credit linkages, to help them with not just additional working capital needs but also to compensate for the dropping out of some of their traditional financiers, in the wake of the transparency of accounts brought about by GST.
This piece appeared as an editorial opinion in the print edition of The Economic Times.
Recommended By Colombia
via MPC: Running faster to stand still