Monetary and Credit Policy: Repo and Reverse Repo Rates Unchanged

The Reserve Bank of India (RBI) has recently released its mid-quarterly review. It has clearly spelt out that monetary policy actions will be in terms of rate cuts going forward, given the moderating growth momentum and higher downside risks to growth.
The RBI kept repo and reverse repo rates unchanged at 8.5 per cent and 7.5 per cent, respectively, to fight rising inflation in Asia's third largest economy. The central bank left Cash Reserve Ratio (CRR–(money that banks must keep with the RBI) unchanged at 4.75 per cent. Recently, the RBI slashed CRR, the portion of deposits banks are required to keep with the central bank, by 0.75 percentage points, a step that was meant to infuse Rs 48,000 crore into the economy.
Earlier on March 9, the central bank cut CRR by a hefty 75 basis points, or three-fourths of one per cent, from 5.5 per cent to 4.75 per cent effective the fortnight beginning March 10.
The markets and the corporate sector were expecting the CRR cut on March 15 when the RBI is scheduled to announce its mid-quarter review. But the central bank said on Friday it feared a liquidity crunch due to the advance tax (to be paid before March 15) outflows; and this would have increased the already tight position of banks due to the usual frontloading of cash balances with the RBI.This CRR cut will inject around Rs. 48,000 crores of primary liquidity into the banking system. Earlier in January, the cut in CRR of half a per cent injected Rs. 31,500 crores into the banking system. The CRR cut was welcomed by banks and the corporate sector.
On January 24, RBI had cut CRR by 0.5 percentage points to 5.5 per cent, releasing Rs 32,000 crore into the system. Since then, the fund crunch has only worsened.
The strain on the system rose to high of Rs 1.02 lakh crore. And going forward it will only increase as by March 15 companies will have to make advance tax payments which will drive out Rs 60,000 crore from the system.
Another Rs 12,000 crore is likely to go out of banks due to the Oil and Natural Gas Corporation (ONGC) auction last week, and a similar amount will be drained out on account of excise duty payment by companies.
Rate of Inflation
Inflation rose to 6.95 per cent in February which is much above the Reserve Bank’s comfort level of 5-6 per cent. RBIs own forecasts of inflation is that it will go down to 7 per cent levels in March 2012 from November 2010 levels of 9.11 per cent. RBI has indicated that non food manufacturing inflation is still a worry as it has gone up from 7.6 per cent in October 2011 to 7.9 per cent in November 2011. However, it has reiterated that despite the rise in non food manufacturing index, headline inflation momentum is slowing down.
The market will now have to work out its own math on inflation. Inflation can surprise on the downside as much as it has surprised on the upside. It is going to be a difficult call on where inflation is headed in 2012, but considering the fact that prices are already at elevated levels with inflation as measured by the Wholesale Price Index (WPI) averaging over 9 per cent for the past two calendar years, inflation has the ability to come off sharply especially if global growth slows down dramatically.
GDP Growth
There are now serious concerns on the slowdown in the Indian economy as the Gross Domestic Product (GDP) growth figures for the September-December 2011 quarter came in a paltry 6.1 per cent, the lowest since the Lehman crisis that shook the global economy in 2009.
The economy has given mixed signals in the past few months with some green shoots being seen on inflation, foreign institutional investor inflows, stock markets, the rupee and policy action picking up.
However, the figures come as a dampener as they are well below estimates. It is clear the lag effect of problems seen last year of low investor confidence resulting in low investment, high inflation and high interest rates and policy inaction are playing out. The surprise is that GDP growth is now at the level seen during the Lehman crisis when the world economy was in a reset mode though the situation has improved since.
GDP growth decelerated to a low of 6.1 per cent in the third quarter of fiscal 2012, raising fresh concerns about the growth slowdown. Industrial sector continues to be the main laggard and grew at an anemic rate of 2.6 per cent due to falling domestic demand and faltering global recovery.
The magnitude of moderation has been a bit of surprise because advance estimates released earlier had pegged financial year 2012-13 growth at 6.9 per cent.
According to FICCI, it would be ironical if GDP growth in 2011-2012 goes below 6.8 per cent, would be lower than in the crisis that was achieved in 2008-09 — the year of the post Lehman crisis.
Foreign Trade
Indian imports continued to outpace exports in February as demand remained weak in major exports markets like the United States and Europe, nudging the government to revise up the full-year trade deficit projections.
A widening trade deficit will likely worsen India's current account deficit and further weaken the rupee. Merchandise exports grew an annual 4.3% to $24.6 billion in February, while imports grew 20.6 percent to $39.8 billion.
The trade deficit widened to $15.2 billion during the month, from $14.8 billion in January.

India-Russia Summit: Efforts To Resolve Bilateral and International Issues

The India-Russia summit has recently been concluded in Moscow. During his discussions with Russian President Dmitry Medvedev and Prime Minister Vladimir Putin, Prime Minister Manmohan Singh made an emphatic point about the utility, execution and expansion of the Russia-assisted Koodankulam nuclear power project, underlines the unerring durability of the relations between the two countries. The value of the relationship for both has transcended changes of government in New Delhi and the changed character of the state from communist to capitalist in Moscow. There were contretemps in Russia when the switch-over to capitalism was in progress, but the dispelling of doubts was swift as the new masters in the Kremlin looked around their region and the globe.
India’s continued pairing with Russia on a range of issues — to do with national security on the political as well as the hardware side, science and technology, and now possibly the education sector in terms of the understanding reached at the just-ended summit — plays a role of balance at a time when India’s relations have been fruitfully advanced with the West, especially the United States. Anxieties in the minds of not a few that the United States is invading every sphere of policymaking in this country appear misplaced when the significance of the Russian connection is understood in its widest meaning. The coming into being of the BRICS (Brazil, Russia, India and China) bloc in international affairs in recent years further cements India-Russia relations, which are not bedeviled by irritants in the bilateral sphere.
Areas of Mutual Interest
The agreements covered all the key areas that underpin the “special and privileged” strategic partnership between the two countries — energy, defence, space, trade and investment, and working together on the international scene. While a formal agreement on Units 3 and 4 at Kudankulam nuclear power project was not signed, pending the resolution of the safety issue controversy in India, the sides moved forward with the project. They agreed on exceptional soft loan terms for the new reactors that will ease the financial burden for India at the time of a global economic slowdown. The talks in Moscow also firmed up prospects for India to expand its presence in Russian oil and gas through joint ventures with Gazprom and Novatek.
Besides the global and regional issues, India and Russia have to further expand their bilateral cooperation in different areas of mutual interest like trade and industry, defense-related matters and civilian nuclear energy.
The two countries do not have a mere buyer-seller relationship. The prime minister has to ensure that more joint ventures, particularly in the area of defense, are undertaken so that India gets cutting-edge technologies from Russia.
Defense Supplies and Technology
In the four decades since the Indo-Soviet treaty the global political, strategic and economic landscapes have changed dramatically, but the core of the bilateral relationship was (and remains) cooperation in defense supplies and technology. In the years following the treaty, Moscow became a very dependable source of defense sales and technology transfer. To be sure, there was uncertainty and disruption of supplies and spares after the implosion of the Soviet Union. But these proved manageable.
Following India’s nuclear tests of 1998 and the ensuing international censure and sanctions, New Delhi and Moscow began moving closer. After Vladimir Putin became president in 2000, Russia and India concluded a fresh strategic partnership agreement.Bilateral Trade TiesDefense and nuclear energy will figure prominently in the prime minister’s discussions in Moscow. Yet it is equally important that both sides resolve at the highest levels to upgrade their economic relations. Bilateral trade has risen from a mere $1.67 billion in 2003-04 to $8.75 billion in 2010. But this fell short of even the modest projection of $10 billion.
An inter-governmental commission has been considering a range of measures to redress this state of affairs, including a comprehensive economic cooperation agreement and revival of the north-south transport corridor through Iran. Unless the two countries are able to add a solid economic layer to their relationship, its strategic dimension cannot be fully leveraged.
Strategic Partnership
Diverse areas of cooperation, from pharmaceuticals and hydrocarbons to information technology and aerospace engineering, which are yet to be explored, allow for optimism. Also, increased defense cooperation between the two countries has provided noteworthy results. At the start of the previous decade, India was only concerned with buying military technology from Russia.
The strategic partnership agreement has also facilitated cooperation in the energy sector. As a net importer of energy, India has increasingly turned to Russia as a major source of oil and natural gas. The Oil and Natural Gas Corporation (ONGC) Videsh has a 20 per cent stake in the Sakhalin-I oil and gas fields. New Delhi has also been keen on acquiring a comparable stake in the Sakhalin-III projects. India has been pursuing this for nearly six years now, but Russia is yet to respond favorably.
International Challenges
Putin takes over as president the following year and India can be assured of Russia’s continuing support with him around. After all, Putin has taken India-Russia relations to a new level since 2000, following the dry years of Boris Yeltsin. The real challenge is to reconcile the positions taken by India and Russia on the Afghanistan issue. While India believes that the US-led the North Atlantic Treaty Organization (NATO) forces should stay in Afghanistan until local forces are adequately equipped to take over, Russia insists that they should leave by 2014.
Moreover, the two countries are also faced with the challenge of evolving complimentary responses to a host of international challenges. The most pressing of these stems from Afghanistan. Even as the US and its allies prepare to drawdown their military presence in Afghanistan, the insurgency remains strong.
Both India and Russia are concerned about continuing instability, but their emphases are somewhat different. India is keen to ensure that Afghanistan does not again become a haven for terrorists, whereas Russia is more concerned about the problem of drugs flowing from that country. Moscow’s somewhat narrow approach is understandable in the light of its troubled history of involvement in Afghanistan. But it will be interesting to see how Russia’s policy shapes up in the aftermath of the US drawdown. The endgame in Afghanistan will unfold at a time when Russia’s relations with the United States are dipping.

India Must Remain Prepared To Country Lashkar-Trained Taliban Attacks

With the recent arrest of two suspected terrorists by the Mumbai Anti-Terrorist Squad (ATS), the conspiracy to blast places in Mumbai has been foiled. This is certainly a big success. Both terrorists are residents of Mumbai. The maps of the Oil and Natural Gas Corporation's (ONGC) tank, Mangaldas market of South Mumbai, and Thakkar Mall of Borivali have been recovered from them. The plot was to carry out blasts at the above places.

Pakistan's Terrorist Group
According to the ATS, both terrorists were in contact with some "uncle" in Pakistan and they were trying to carry out the plot at his behest. It has also been said that both terrorists have received training in Pakistan. It has not been ascertained to which Pakistani terrorist group they are linked to, but it is not difficult to guess.

The needle of suspicion only points toward the Lashkar-e-Taiyiba (LeT). It has threatened to carry out 26/11-like big terrorist attack on Mumbai. Intelligence sources also have been issuing warning.

Suicide Attacks in India
In Gujarat also one terrorist has been arrested. He is said to be linked to the Hizbul Mujahidin. He used to brainwash the youth and send them to Pakistan for training. After the plot to attack Mumbai has been foiled, the country would have to remain even more alert. The threat of terrorism continues. Pakistan-sponsored LeT has released its modules all around India with the help of the Inter-Services Intelligence (ISI), who are spread across the country. We would have to crush these traitors at home.

Reports are also received through the intelligence sources that the LeT is training Taliban terrorists, who have surrendered before the Pakistani Army, for carrying out suicide attacks in India. At the instance of the Pakistani Army, the LeT is training the Taliban for suicide attacks in India. In fact, it would be a serious challenge for our security system, but we should be prepared to deal with the same.