Central bank and cricket

Rahul Dravid blamed the poor and slow track at the Narendra Modi Stadium in Ahmedabad for India’s defeat in the World Cup 2023 final against Australia last month. He said that the track did not offer the turn that the team management expected and that’s why they could not spin a web around the Australian batters.

When it comes to batting, Reserve Bank of India (RBI) Governor Shaktikanta Das knows how to play on different pitches. In the October policy, Das, a cricket aficionado, had said, “It is a turning pitch and we will play our shots carefully.” The policy he unravelled was hawkish and cautious. Last week, when the Monetary Policy Committee (MPC), the rate-setting body of the Indian central bank, held its meeting, the pitch was far better but Das didn’t lower his guard.

There’s no change in the policy rate as well as its stance. For the fifth meeting in a row, the repo rate remains unchanged at 6.5 per cent and, the stance, “withdrawal of accommodation”.

The policy raised the estimate of the real GDP growth for the current year. The raise itself was not a surprise but the margin is — to 7 per cent, half a percentage point more than what the central bank had been saying since April. This means after growing at 7.8 per cent in the first quarter and 7.6 per cent in the second, the GDP has to grow on an average 6.3 per cent in the next two quarters against the earlier RBI estimate of 6 per cent and 5.7 per cent, respectively.

The RBI has raised the real GDP growth for the first quarter of FY25 too marginally, from 6.6 per cent to 6.7 per cent (and gradual decline in the second and third quarters — 6.5 per cent and 6.4 per cent, respectively).

This is far higher than all estimates by different agencies. For instance, the International Monetary Fund projects India’s growth at 6.3 per cent in the current year, the same as estimated by the World Bank. Ditto the projections of Organisation for Economic Co-operation and Development, Asian Development Bank and Fitch Ratings. Standard & Poor’s, in its Global Credit Outlook 2024, pegs India’s GDP growth rate marginally higher at 6.4 per cent for the financial year ending March 2024. The growth rate will remain at 6.4 per cent in the next fiscal (2024-25) before climbing to 6.9 per cent in the next and 7 per cent in 2026-27, the rating agency says. Another global rating agency, Moody’s, pegs India’s 2023 calendar year growth forecast at 6.7 per cent. Most of them have revised the forecast in the past few months but none expects 7 per cent growth.

When it comes to inflation, there is no change in the RBI projection. It remains 5.4 per cent for FY24 — 5.6 per cent in the third quarter and 5.2 per cent in the fourth. Retail inflation softened to its four-month low of 4.87 per cent year-on-year in October, from 5.02 per cent in September, driven by a broad-based decline in the so-called core or non-food, non-oil inflation as well as fuel inflation while food inflation did not show any sign of decline. Clearly, the figure will be much higher in November and December.

The next year’s retail inflation projection is 5.2 per cent in the first quarter, 4 per cent in the second and 4.7 per cent in the third. The risks are evenly balanced.

Since the RBI targets 4 per cent inflation with a 2-percentage point band on either side, the earliest it will be within the RBI target is in the second quarter of the next financial year— that too just for that quarter. This is why the RBI is in no hurry to take a look at cutting the policy rate and even changing the stance to neutral.

The liquidity management continues to remain key to the policy. However, the tone sounds a bit less hawkish. Liquidity in the banking system, as measured by the net position under the liquidity adjustment facility (LAF) or the difference between how much the commercial banks are borrowing from the central bank’s different windows and how much they are parking with it, turned into deficit mode for the first time in September 2023 after a gap of four and a half years since May 2019. This is the result of a rise in the quantum of currency with the public during the festival season, government’s cash balances kept with the RBI and the central bank’s market operations.

In fact, the liquidity tightening in the recent past has been significantly higher than what the MPC’s October meeting had envisaged. This is why the RBI has not undertaken any government bond sale through auctions in the so-called open market operations (OMO), outlined in the last policy. Das has not repeated the “threat” of OMO sales but said the RBI would remain nimble in liquidity management as the liquidity pressure will ease with government spending.

To come back to the cricket analogy, in the five years at the helm of the RBI, Das has played on different and difficult pitches.

First, he had to fight the Covid-19 pandemic and recession. He did that by following an ultra-loose monetary policy, offering a moratorium on loan repayment, and bringing the policy rate down to its historic low (4 per cent). He even introduced helicopter shots in the form of LTRO and TLTRO (long term repo operations and targeted long term repo operations) to give comfort to the system.

The next fight was against inflation and depreciation of the local currency. Retail inflation soared beyond the upper limit of the RBI’s target for 10 months in a row in 2022, after breaching it for eight successive months in 2020. The RBI had to explain the reasons to the government (higher inflation for three successive quarters calls for such an explanation).

Until Russia’s invasion of Ukraine, Das’s objective was to remain accommodative as long as necessary to secure growth. But sensing that the ball was turning, he first hiked the rate in May 2022, off-cycle, a month ahead of the MPC meeting. This was 12 hours before the US Federal Reserve raised its policy rate by half a percentage point, the highest in 22 years, to tackle the worst inflation the US has seen in four decades. The rate hike cycle ended in February this year, raising India’s policy rate to 6.5 per cent.

Since then, it has been a long pause. While the economy seems to be on a firm growth path, the fight against inflation is not over yet. It has not even entered the last round. As I have already written, according to RBI estimates, it will drop to 4 per cent in the second quarter of FY25, before rising again in the third quarter. Provided all other parameters remain the same, we may see the RBI changing its stance in the September quarter next year and follow it up with the first rate cut. Das seems to be in no hurry. After playing well through a five-year test match, he doesn’t want to get out hit wicket.

At the Business Standard BFSI Summit on October 31, Das advised the bankers to play long term, like Dravid. He himself bats like Dravid and the pitch doesn’t affect his batting.

Writes Banker's Trust every Monday in Business Standard. 

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