After the Credit Policy...

We were looking at 50 bps in sympathy to the high inflationary pressures. Instead, RBI delivered 25 bps and talked more clearly than ever on its stance. The prognosis doesnot seem good.

The most damaging is the direct message to banks to slow down credit. This is a matter how you view it. A high credit deposit ratio can mean higher than normal credit or lower than normal deposit accretion. Clearly, the systemic shortage in liquidity points to the latter and not the former. A direct message to reduce credit would mean that the trade-off between inflation and growth is taken.

Second most damaging is the message that RBI's hands are tied on liquidity injection in times of tight monetary stance. There-is-only-that-much-RBI-can-do language to me, means that we now have an aggressive Central Bank that will not bother to balance all variables and is not apologetic about it.

For me these signify a tighter stance than what a 50 bps hike would have meant. There would be more rate hikes... [unless food/fuel inflation & growth start tapering off very fast, an unlikely scenario]. And we have to be on the look out for spikes in interest rates since availability of credit is not automatic. As history would show, in most such situations, the price damage is done much before the Central Bank tries to address the issue. Have a good one and be worried on interest rates..........