Growth slowdown bottoming out, says RBI governor Urjit Patel

While expectations on price rise remain stable for the moment, “considerable caution and vigilance is warranted on the inflation front” but the slowing in growth could be over, said Reserve Bank of India (RBI) Governor Urjit Patel.

“Recent success in containing inflationary pressure needs to be viewed in the broader context of entrenching macroeconomic stability, in which the government has played a crucial part,” Patel said in opening remarks at a recent conference on ‘Financial System and the Macroeconomy’.

The consumer price index (CPI)-based inflation rate quickened to 4.88 per cent in November, from 3.58 per cent in October. The rate in June had fallen to a record low of about 1.5 per cent. The central bank works within a framework that aims to keep inflation anchored around a central 4 per cent, in a range of another two percentage points either way.

The government has actively managed price pressure on some key food items, the governor said. 

“The economy is at an important juncture. Our recent growth numbers might have disappointed some in the first quarter of this fiscal year but the second quarter (July-September) has recorded an uptick and the slowdown may well be bottoming out.”

“If one sees far, structural changes that come with temporary disruptions can be growth- and efficiency-augmenting in the medium to long term. This is what has happened, for instance, with introduction of the GST (goods and services tax). It should yield gains that will mean better tax compliance and a more efficient tax system that, in turn, will impart a permanent upward push to our growth.” 

He mentioned a couple of positives. “The current account deficit remains within sustainable levels. Other indicators of external viability, such as the ratios of indebtedness to GDP (gross domestic product) and/or reserves, are also reflecting a healthy improvement.” 

In this context, Patel praised the government for pursuing a path of fiscal consolidation and containing the public debt. As a result, international investors have warmed to where the Indian economy is positioned, reflected in sizable foreign investment inflow.

Meanwhile, domestic financial markets have shown resilience and stability, in spite of escalation in global geo-political uncertainty and heightened financial market volatility, he said. “These developments have enabled the build-up of buffers against unforeseen shocks.”

India’s foreign exchange reserves have crossed $400 billion. RBI deputy governor Viral Acharya said on Thursday at a separate event that reserves, without some form of capital control, were not enough to stem volatility when portfolio flows reverse. Through caps on investment and coupons that can be offered to investors, India has raised some protection against such an eventuality. 

While stating that India and other emerging countries are in an environment of excessive financialisation, the RBI governor once again argued for making swap lines with developed countries equally available for everyone, rather than keeping these for a privileged few.

“While emerging markets have shown a degree of resilience to the turmoil of recent years, they remain vulnerable to liquidity and bridge financing gaps that are debilitating, even if transitory. Against this background, building up adequate buffers in the form of foreign exchange reserves is a natural self-insurance to manage these risks better and, thereby, prevent the risks from assuming systemic proportions, threatening financial stability,” Patel said.

Terming the Insolvency and Bankruptcy Code a ‘landmark development’, he said the ensuing ordinance “scales up the ability of the Reserve Bank to deal decisively with stress in banks' balance sheets and unclog the flow of credit to grease the wheels of growth.” 

“In the year ahead, we must seize this opportunity to overcome the debilitating problem of corporate loan delinquency and get our banks back into the mainstream of financial intermediation.”