10 policy questions RBI governor addressed in his CII speech

22 Mar 2022 , 01:14 PM

With the US Fed hiking rates by 25 bps and committing to another 6 rate hikes in as many FOMC policies this year, the focus shifts to the RBI. The Monetary Policy Committee (MPC) of the RBI meets in April for a crucial meeting wherein the RBI may have to bite the bullet on interest rate hike.

In a speech delivered at the CII National Council Meeting, the RBI governor, Shaktikanta Das addressed many of these crucial question pertaining to the current macroeconomy, likely policy shifts and the big concerns over inflation and growth. Here are 10 such issues that Das addressed in his speech.

1) Is it time to shift from accommodative to Neutral stance?

In his speech, Dr. Shaktikanta Das underlined that the RBI had infused close to Rs17 trillion of liquidity into financial markets in the last 2 years since the COVID pandemic began. The idea was to ensure that catalysing the recovery in GDP remained the primary driving force of the Monetary Policy Committee. Das underlined that the commitment of the RBI and the MPC to foster growth above all else, had not changed over last 2 years.

2) Will inflation remain elevated in the short term

While the Monetary Policy Committee has not dropped the use of the term “transitory” to describe inflation (unlike in the US), the RBI governor has reiterated time and again that sticky and elevated inflation levels were here to stay. Despite the best efforts of RBI and the government in addressing supply chain bottlenecks, the core inflation at above 6% means that inflation was not going away easily.

3) Does the 4.5% inflation target for FY23 still hold?

That is a logical corollary. Shaktikanta Das hinted in his speech that the FY23 inflation estimates of 4.5% may be too conservative, almost to the point of being impractical. He did believe that the retail inflation in FY23 would be much higher than that figure. In fact, RBI is likely to modify the inflation expectations for FY23 upwards and that is likely to be presented in the April monetary policy.

4) Can India handle a sustained Russia Ukraine war?

This obviously is the biggest question mark before most of the global economies. Das admitted that the ongoing Russia-Ukraine war had added to the already existing input cost pressures. Apart from oil, even food products, chemicals and minerals had become awfully expensive. However, Das expressed confidence that with a forex chest of $622 billion and a current account gap of less than 2%, the situation was under control as RBI and government had the internal wherewithal to handle outcomes of war.

5) How sound are Indian banks compared to 2020?

Any discussion about the vulnerability of the economy begins with the vulnerability of the Indian banks. The RBI governor, in his speech, has underscored his optimism about Indian banks emerging stronger than the troubled period of 2020. For instance, the average capital adequacy was above 16% while the gross NPAs were less than 6.5%, with substantial provisioning already done. Regarding provision coverage ratio (PCR), average PCR of 69% was almost at the targeted level of 70%. However, only 6 PSU banks had PCR above 70%.

6) Will the RBI hike rates in its April monetary policy?

That was a question that the RBI governor skirted as he did not want to commit himself to any stance. Bank of England has hiked rates 3 times. US hiked rates by 25 bps and targes another 6 rate hikes this year. That may force RBI to hike rates in April policy to prevent migration of debt capital. Also, the RBI governor made an interesting point on maintaining rupee stability. With the INR at close to 76.50/$, the only way to stabilize the rupee is by strengthening it and that can be achieved by a rate hike. The indications are there of a rate hike, although the RBI governor has not committed himself to any point of view.

7) Is it time for a monetary policy reversal?

This is where the RBI has chosen to be deliberately ambiguous. While a rate hike of 25 bps could be in the offing, RBI continues to reiterate that sustaining growth would be its primary objective rather than controlling inflation. Hence, it is not yet clear if the RBI would go ahead and shift its accommodative policy stance. At least, the trajectory of the RBI policy at this juncture does not even look remotely as hawkish as the US Fed or Bank of England.

8) What are high frequency indicators pointing to?

In his speech at the CII National Council, Shaktikanta Das, dwelt at length on the interpretation of high frequency indicators. These high frequency indicators capture the short term growth momentum of industrial production and GDP. Some of the popular high frequency indicators include PMI manufacturing, PMI services, GST collections, E-Way bills, freight movement etc. The 60 HFIs are hinting at robust recovery in growth. Among the momentum indicators, the only risk could stem from the month-on-month change in the retail inflation and the wholesale inflation.

9) How will be the current account gap be funded?

The current account gap shows the extent to which the net revenue shortfall needs to be funded. It includes all the non-capital items. Current account gap cannot be funded by borrowings as it would be like borrowing for your morning breakfast. Das expressed confidence that the current account gap can be funded by stable sources like FDI flows, median portfolio flows etc. Hence even CAD crosses 2%, the overall risk is limited.

10) How real is the stagflation risk?

Stagflation risk has become the one big risk for emerging economies. Stagflation refers to a very painful situation for any economy wherein the inflation is going out of bounds while growth is stagnating. According to Das, stagflation risk was ruled out in India for several reasons. Firstly, growth was not showing any signs of faltering, if you go by the high frequency indicators. Secondly, Das is confident that 6% plus inflation should be more an exception than the rule and should moderate soon enough.

To summarize, Das has hinted that India may take cues from the Fed and BOE, but its policy stance will not be determined by global factors alone. For now, the Indian economy looks to be in safe hands and in fine fettle.