Monetary policy review: Rate cut is off the table, says Urjit Patel

After the RBI’s fourth bi-monthly monetary policy review, Governor and other top officials spoke to the media on the central bank’s decision to hold rates, currency and debt markets, and its view on non-banking finance companies (NBFCs).



On forex reserves and rupee



Governor Urjit Patel: Foreign exchange reserves at $400.5 billion are sufficient to finance 10 months of imports. Notwithstanding the improvements in these fundamentals, the exchange rate of the rupee has experienced bouts of volatility since the MPC last met in August. In particular, India has not been immune to global spillovers of external factors.

Depreciation of the rupee has, however, in some aspects been moderate in comparison to several other emerging market peers. By September, the rupee had depreciated in nominal effective terms by 5.6 per cent since end March. In real terms, rupee depreciation has been at five per cent. The RBI’s response to these unsettled conditions is to ensure that the foreign market conditions remain liquid with no undue volatility. There is no particular band or target around any particular exchange rate which is determined by market forces of demand and supply.



On strengthening macro

Patel: With global headwinds posing major risks to the growth and inflation outlook, the MPC believes that the highest priority is further strengthening of domestic macroeconomic fundamentals.

It is prudent for the Indian economy to continue to recalibrate macroeconomic stance and direction to further buttress resilience against global headwinds. The primary responses in these areas include maintaining steadfastly the inflation credibility of MPC and sticking to fiscal policy targets at the general government level, the Centre and state combined. (The third is) allowing flexible exchange rate adjustment fluctuations without undue volatility to help reorient current account balance given revised terms of trade. (Fourth) retaining adequate capital and liquidity buffers in the financial sector so as to maintain financial stability especially when retail credit growth is in excess of nominal GDP growth. Fifth, undertaking further structural reforms to propel domestic growth engine and liberalising capital flows including foreign direct investment, subject to macro-prudential constraints while also increasing attractiveness of domestic economies to such flows.

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Repo rate


The strong growth tailwinds of the Indian economy and the RBI’s balance sheet preparations should help smooth short-term fluctuations while these medium to long-term policy reforms, which are actively considered, are also being pursued to buttress the economy.



On debt market

Viral Acharya: The RBI along with the government and the Securities and Exchange Board of India are closely monitoring the situation in the short-term debt markets.


I would like to urge all financial firms to place greater reliance on equity and other modes of long-term finance for funding long-term assets rather than relying excessively on short-term wholesale paper. Chasing lower marginal costs of funding in order to acquire or retain market share in lending is a myopic strategy. It is associated with significant roll-over risks in the medium term and this practice appears to have led to a maturity rat race in financing of the financial sector. Increasing asset-liability mismatch in this manner can be a particularly imprudent policy in a time of global and domestic tightening conditions, it is best to avoid this in order to safeguard financial firms’ own balance sheets as well as for overall financial stability.



On monitoring NBFCs

N Vishwanathan: In the wake of the anxiety in the NBFC sector, the RBI is closely monitoring the segment. The regulatory and supervisory framework for the sector hinges on three principles: protection of depositor interest for deposit-taking NBFCs, healthy customer interface and avoiding systemic risk. The NBFC sector overall is quite strong and the regulatory framework is robust. We have moved towards harmonising the regulations and have fully synchronised the NPA (non-performing assets) recognition norms for the NBFCs with the banking system. Earlier this year we have initiated the process of weeding out many of the non-compliance small NBFCs.



On risk to fiscal deficit

Patel: The Central government recently committed to the fiscal deficit targets and moved some of its borrowing from the markets to the National Social Security Fund and other small savings instruments. However, it is important that the fiscal deficit target is maintained not only for the reasons mentioned but also to mitigate the risk of further crowding out. When the Centre and states’ borrowing programme is taken together, it is of a large quantum and therefore, I assume given that these decisions were taken only a few days in between that this possibly internalised. So far we have to take that at face value.



On maintaining status quo on rates

Patel: The mandate of the MPC is a legislated one and it is a flexible inflation targeting mandate at 4 per cent, with a band of +/- 2 (per cent). To the extent of international and domestic financial conditions including commodity prices effect inflation outlook and the projections that is internalised in the projections and in that respect the risks that you mentioned are already baked in, with respect to the forecasts and the decision that we took today. Please do recall that prior to this we had two rate hikes in the space of literally, two months and today’s stance of calibrated tightening essentially means that in this cycle, rate cut is off the table and that we are not bound to increase rates at every meeting because that is not required given our inflation outlook and forecasts at this point in time. As new data comes in we would look into changing our policies accordingly, but the calibrated tightening is the appropriate stance at this point in time.


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Acharya: The exchange rate is a price and the rupee-US dollar is a fairly deep market, it gets determined by supply and demand forces. The RBI’s stated policy has always been to manage undue volatility rather than a very specific level, and as the Governor already articulated, exchange rate adjustment is an important part of how your economy adjusts to trade shocks. The second is the managed float (mechanism) is what roughly the RBI’s stated policy is and which is essentially what the RBI’s foreign exchange operations pursue. And as far as interest rate is concerned, it is exclusively focused on its mandate which is flexible inflation targeting.


On change in stance from neutral to calibrated tightening

Patel: Well the stance is not necessarily a deferred action that could be said even with a neutral stance. What this stance indicates very clearly is that going forward there are only two options in this particular rate cycle, either we increase rates or keep them steady. With a neutral stance a cut was also on the table, so I think it is very clear that we are focused on the 4 per cent inflation target on a durable basis, as RBI’s long standing policy underscored by Dr Acharya and I. That the monetary policy is exclusively focused on inflation targeting and that is the legislative mandate. On the status quo on rates it 5:1 and on the stance it is 4:2.

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