Tag: Governor Shaktikanta Das

RBI needs to ensure nascent revival of economic activity shows signs of durability: Governor Shaktikanta Das

Banking & Finance

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Reserve Bank of India Governor Shaktikanta Das said the central bank needs to ensure that the nascent revival of economic activity shows signs of durability and sustainability. At the Monetary Policy Committee (MPC) meeting, held between October 6 and 8, 2021, Das referred to an ever evolving and dynamic environment, with the outlook overcast by several uncertainties including the fact that the pandemic is far from over.

“At this critical juncture, our actions have to be gradual, calibrated, well-timed and well-telegraphed to avoid any undue surprises,” the Governor said.

Professor Varma’s take

According to the Minutes of the MPC meeting released by the RBI on Friday, Jayanth R Varma (Professor, Indian Institute of Management, Ahmedabad) was the only MPC member who voted against the accommodative stance and was not in favour of the decision to keep the reverse repo rate at 3.35 per cent. He had taken a similar stand at the previous MPC meeting.

Varma reiterated that the Covid-19 pandemic has mutated into a human tragedy rather than an economic crisis, and monetary policy is not the right instrument to deal with this.

“…The ill effects of the pandemic are now concentrated in narrow pockets of the economy, and monetary policy is much less effective than fiscal policy for providing targeted relief to the worst affected segments of the economy,” he said.

“…Inflationary pressures are beginning to show signs of greater persistence than anticipated earlier,” the Professor said.

He flagged two other risks – one to inflation (the ongoing transition to green energy worldwide poses a significant risk of creating a series of energy price shocks) and the other to growth (the tail risk to global growth posed by emerging financial sector fragility in China) – are well beyond the control of the MPC, which warrant a heightened degree of flexibility and agility.

Varma opined that a pattern of policy making in slow motion that is guided by an excessive desire to avoid surprises is no longer appropriate.

Views of other members

Shashanka Bhide, Senior Advisor, National Council of Applied Economic Research, Delhi, noted that in the context of the uncertainties in the external demand and price conditions and an uneven sectoral growth pattern, an accommodative monetary policy stance and broader policy support are necessary at this juncture for strengthening the growth momentum and reducing inflation pressures.

Ashima Goyal, Emeritus Professor, Indira Gandhi Institute of Development Research, Mumbai, observed that global price shocks have turned out to be more persistent, contributing to sticky core inflation.

She emphasised that tax cuts on petroleum products are essential to break the upward movement that could impart persistence to domestic inflation.

Goyal felt that liquidity needs to be kept in sufficient surplus to absorb large shocks from foreign flows, government cash balances and currency leakages even as the excess is reduced allowing the reverse repo to rise gradually and arrangements for non-banks remain in place.

She suggested that a higher fixed reverse repo rate for banks could be linked to raising their interest rates on deposit accounts.

‘Close watch needed’

MD Patra, Deputy Governor, RBI, said even as domestic macroeconomic configurations are improving, the risks from global developments are rising and warrant a close watch as they could stifle the recovery that is underway in India.

“…In my view, the biggest risks to India’s macroeconomic prospects are global and they could materialise suddenly,” he cautioned.

Mridul K Saggar, Executive Director, RBI, stated that if at all some guidance is needed at this stage, it has to be a soft one, with the Reserve Bank preparing markets that while policy stance is likely to remain accommodative till growth is revived on a durable basis, liquidity levels will be adjusted dynamically to appropriate lower levels that are still consistent with accommodative stance.

“…In my judgement, if no new disruptions to growth emerge, output gap will close sometime in 2022-23 and monetary policy should start to gradually reposition to lowering underlying inflation and inflation expectations next year, especially if inflation edges up from the energy and services side amid sticky goods core inflation,” Saggar said.

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Decision-day Guide, BFSI News, ET BFSI

Banking & Finance

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By Anirban Nag

India’s monetary policy makers are likely to leave interest rates untouched for a seventh straight meeting, as their focus remains more on fixing a fickle economy than on controlling stubborn price pressures.

The Reserve Bank of India’s six-member Monetary Policy Committee is meeting amid weak indicators raising doubts about the economy’s ability to sustain a nascent recovery. Some parts of the nation, where the fast-spreading delta variant was first identified, are still battling a rise in Covid-19 infections with researchers warning of an impending third wave of the pandemic.

All 21 economists surveyed by Bloomberg as of Wednesday afternoon expect the MPC to leave the benchmark repurchase rate unchanged at 4% on Friday. While the RBI is widely expected to announce another tranche of its so-called government securities acquisition program, bond traders will be watching for any cues on return to policy normalization.

For now, Governor Shaktikanta Das has maintained that growth is the main challenge and that inflation, while sticky, is only a “transitory hump.”

Here’s what to watch for in the MPC decision to be announced by Das in Mumbai on Friday morning:
Inflation ‘Chameleon’
The governor is likely to bump up the RBI’s inflation forecasts, given the ripple effect of a sustained rise in input costs along with high fuel taxes.

Headline inflation is already hovering well above the upper tolerance limit of the central bank’s 2%-6% target band, and some economists see the measure breaching the RBI’s 5.1% outlook for this fiscal year to end up in the region of 5.5%, or thereabouts.

“Several inflation drivers have come and gone,” said Pranjul Bhandari, chief India economist at HSBC Holdings Plc. in Mumbai. “But inflation has stayed elevated, like a chameleon, adapting itself rather quickly to the driver of the day. In recent months, price pressures have spread widely across the food and core baskets.”

Growth Prospects
The central bank is likely to retain its growth estimate of 9.5% for the year to March 2022.

A slew of high frequency indicators from purchasing managers’ surveys to mobility indicators and tax collections indicate a rather uneven recovery from the pandemic’s second wave. Hopes that the monsoon rains, which have been below normal in July, will pick up in the August-September period and provide a boost to rural demand is likely to provide some comfort to policy makers who are focused on reviving growth.

Normalization or Not?
With inflation running near the upper end of the RBI’s target and the economy showing signs of a recovery, bond investors are of the view that the central bank could signal when it intends to start unwinding some of its extraordinary easy policy.

Although Das has reiterated that normalization is not on his mind yet, economists are of the view that stubborn inflation could force his hand.

Withdrawing some of the excess funds in the banking system via longer dated reverse repo auctions — an action it took at the start of the calendar year — could be a start of that process. Bloomberg Economics estimates excess cash is at over 8 trillion rupees ($107.8 billion).

RBI's policy rates anchored at lows despite inflation: Decision-day Guide
“The RBI could re-announce the long tenor variable rate reverse repo auctions as the first step toward normalization,” wrote Samiran Chakraborty, chief India economist at Citigroup Global Markets in Mumbai. “Beyond that, the MPC is unlikely to provide much guidance on the timing and pace of normalization.”



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