Transmission of monetary policy to influence economic development: Moody's

Mumbai: With the Reserve Bank of India (RBI) not altering policy rates, it will be only the transmission of monetary policy that would influence India`s economic development and credit profile, credit rating agency Moody`s Investors Service said on Wednesday.

In a statement Moody`s said the transmission will depend on a range of factors like the effectiveness of the monetary policy framework in maintaining inflation at moderate levels could be tested this year.

"The RBI highlighted today the uncertain trajectory of inflation.

In particular, despite favourable weather forecasts, India is not immune to the risk of a renewed rise in food prices.

A third consecutive year of unfavourable weather could have a significant impact on inflation as food producers and retailers are less willing or able to absorb the price shock, at a time when the disinflationary impact of lower global energy prices wear off," Marie Diron, Senior Vice President, Sovereign Risk Group, said

According to her, a renewed sharp depreciation of the rupee, potentially linked to volatility in global financial markets, could also stoke inflationary pressures.

Moreover, with details of the implementation of the Pay Commission`s recommendation still unclear, the outlook for wage, housing and overall consumer price inflation remains uncertain and subject to upside risks.

Moody`s also said the transmission of monetary policy will depend on progress in the clean-up of bank balance sheets.

"While the process has started, we do not expect rapid progress and a significant change in the ability and willingness of banks to increase lending or in corporates` appetite for borrowing.

As such, the RBI`s accommodative monetary policy stance is unlikely to translate into a rapid expansion of credit and markedly higher growth in the near term," Diron said.

Medium term, the bankruptcy law, if effectively implemented, is credit positive for banks and will contribute to ease monetary policy transmission to the real economy.

According to Moody`s, a change in the RBI`s management of liquidity should support transmission of monetary policy.

"Overall, we expect inflation to remain broadly stable at moderate levels, notwithstanding potential short-lived spikes driven by food inflation or external factors," Diron said.

Sustained moderate inflation would support robust growth in the medium term by enhancing visibility for corporates and households.