Monetary policy: No concern on growth, no comfort on inflation

Not too many were expecting a rate cut by the Reserve Bank of India (RBI) despite the recent turmoil in global markets and near-certainty about the US Federal Reserve’s first rate cut in four years in September. But there had been talks about a possible change in the stance. RBI Governor Shaktikanta Das has just two words for the market: Have patience.

The markets seemed to have listened to him. Movements in both bond yield, as well as currency, were muted in the absence of any surprise in the policy.

It’s pretty obvious that at this point, the Indian central bank has no concern on growth and no comfort on inflation.

So, the status quo continues for the ninth policy in a row. The repo rate, or the rate at which the RBI extends funds to banks, remains unchanged at 6.5 per cent. The stance, too, remains the same — withdrawal of accommodation to “ensure that inflation progressively aligns to the target, while supporting growth”.

Like in the past, Das has refrained from any forward guidance. The undertone is neither hawkish nor dovish — it’s neutral. While those expecting a change in the stance are disappointed, others who were afraid of any tightening measure to drain excess liquidity from the system have heaved a sigh of relief. In that sense, it’s a please-all policy, par for the course.

The RBI estimate of growth, as well as, inflation for the current financial year remains unchanged, but there has been some fine-tuning.

For instance, the real GDP growth estimate for FY25 is 7.2 per cent — there is no change from the figure announced in June.

But the growth for the first quarter has been pared from 7.3 per cent to 7.1 per cent. The projection for the first quarter of FY26 is 7.2 per cent.
 

Similarly, the retail inflation estimated for the year remains unchanged at 4.5 per cent. But the estimate for the second quarter is being raised from 3.8 per cent to 4.4 per cent, for third quarter from 4.6 per cent to 4.7 per cent, while the estimate for the fourth quarter has been cut from 4.5 per cent to 4.3 per cent. For the first time, the RBI has given the retail inflation estimate for the first quarter of FY26 at 4.4 per cent.
 

Indeed, the growth story is resilient and inflation is moderating but the pace of disinflation is uneven and slow. Das has not pressed any panic button but made it clear that inflation still remains the Enemy No 1 and the RBI will not change the course of action unless the inflation genie is bottled.
 

Of course, evolving global scenarios will have a bearing on its action. That’s a given.
 

But, the level of current account deficit is comfortable, and with record $675 billion foreign exchange reserves and sound macroeconomic landscape, there is no need to worry, even if external factors deteriorate.
 

For the time being, the Monetary Policy Committee (MPC), the rate-setting body of the central bank, has reiterated the need to continue with the disinflationary stance until a durable alignment of the headline inflation with the target is achieved. The flexible inflation targeting regime that started almost eight years back sets the target at 4 per cent, with a 2 percentage-point band on either side. It also reminds us of the classic textbook economic theory:  “Enduring price stability sets strong foundations for a sustained period of high growth”.
 

Like in the previous policy, this time too, there have been two dissenters in the six-member MPC:  Ashima Goyal and Jayanth R Varma. Both pitched for a change in the stance of the policy to neutral and a quarter percentage point cut in the rate. This is the last meeting of the current MPC. By October, it will have three new members with Goyal, Varma and Shashanka Bhide stepping down.
 

Unless global growth takes a severe beating, volatility tightens its grip on the markets persistently, and the US Federal Reserve goes for a deeper rate cut in September, a rate cut by the RBI's MPC is almost ruled out in calendar year 2024. There could be a change in stance though.
 

In the absence of any monetary policy-related action, this policy will be discussed for the following non-monetary measures:

# The RBI proposes to set up a public repository of digital lending apps (DLAs). Once the regulated entities start reporting and updating information about their DLAs in this repository, for consumers identification of unauthorised lending apps won't be a difficult task.
 

# It also proposes to raise the frequency of reporting of credit information by credit information bureaus to a fortnightly basis, or at shorter intervals. Once this is done, borrowers will benefit from faster updation of their credit information, especially when they repay their loans. The lenders, too, will be able to make better risk assessments of borrowers. Now, the reporting is done monthly.
 

# Currently, the transaction limit for Unified Payments Interface (UPI) is Rs 1 lakh, except for certain categories of payments, which have higher transaction limits. It has now been decided to enhance the limit for tax payments through UPI from Rs 1 lakh to Rs 5 lakh per transaction. This and certain other measures will deepen the digital payments architecture.
 

# Finally, the RBI plans to introduce continuous clearing of cheques. Currently, the clearing cycle could be as long as two working days. Once the new system is put in place, cheques will be cleared within a few hours on the day of presentation.

The RBI has also expressed serious concerns on at least a couple of issues:
 

@ The rise in risk weight, or capital requirement, for personal loans in November last year have shown moderation in credit growth but certain segments of personal loans continue to witness high growth. Excess leverage through retail loans, mostly for consumption purposes, needs careful monitoring.

@ Topup housing loans have been growing at a brisk pace. Some lenders have also been offering topups on gold loans, without following risk weights and monitoring end-use of funds. Money could be used for unproductive and speculative purposes. The RBI is keeping a hawk eye on this.

The writer is an author and senior advisor to Jana Small Finance Bank Ltd. His latest book is Roller Coaster: An Affair with Banking. To read his previous columns, log on to www.bankerstrust.in

X: @TamalBandyo