A realignment

RBI gives primacy to growth concerns

In his maiden monetary policy review briefing, Reserve Bank of India Governor Shaktikanta Das outlined the Monetary Policy Committee’s (MPC) decisions that would please almost everyone — from the average home loan borrower to the government. The MPC decided, by a majority decision of 4-2, to cut the repo rate by 25 basis points. What is equally important is that this cut was preceded by a change in the RBI’s policy stance from “calibrated tightening” to “neutral”. In other words, there is an opening for another rate cut by April 4, which could be crucial, given the timing of the Lok Sabha election. The significant shift in stance, as well as the cut, comes after a revision of the inflation outlook for the year ahead. 

The retail inflation rate, measured by year-on-year change in the consumer price index, has declined from 3.4 per cent in October 2018 to 2.2 per cent in December, the lowest print in the last 18 months. Even the CPI inflation rate, excluding food and fuel, has decelerated to 5.6 per cent in December from 6.2 per cent in October. What’s even more important is that the inflation outlook, too, has become more benign. Inflation expectations of households, measured by the December 2018 round of the RBI’s survey, softened by 80 basis points for the three-month ahead horizon and by 130 basis points for the 12-month ahead horizon over the last round. Similarly, producers’ assessment of inflation in input prices eased in Q3 as reported by manufacturing firms polled by the RBI’s industrial outlook survey. As a result, assuming a normal monsoon in 2019, retail inflation, which is the key metric that the RBI is supposed to target and maintain at 4 per cent (plus/minus 2 percentage points), is expected to range from 2.8 per cent to 3.9 per cent in the coming 12 months.

Well-contained inflation has provided the RBI the space for policy action to focus on growth concerns. The governor listed some of these concerns — for one, within India, aggregate bank credit and overall financial flows to the commercial sector are not yet broad-based. Moreover, muted global growth and trade tensions can provide headwinds. As such, even though the RBI did not change its growth outlook for the year ahead, it did underscore that the need is to strengthen private investment activity and buttress private consumption.

Along with the monetary policy review, the RBI governor also unveiled a whole host of regulatory measures aimed at broadening and deepening the financial markets. In particular, there were sops for beleaguered non-banking financial companies (NBFCs), wherein the RBI took steps to facilitate the flow of credit to them by deciding that the rated exposures of banks to all NBFCs, excluding core investment companies (CICs), would be risk-weighted in accordance with the rating agencies’ prescriptions. Overall then, the latest monetary policy statement appears to signal a closer alignment between the RBI’s mandate for price stability and the government’s concern for higher economic growth. This is a heartening development, especially since it comes after a fairly acrimonious phase between the two institutions. The only fly in the ointment could be the possibility of fiscal slippage, but by the look of it, the RBI wants evidence of it before acting.