RBI report points at hawkish stance, may put growth at risk, say experts

Written by fe Bureau | Mumbai | Updated: Jan 23 2014, 23:42pm hrs
Reserve Bank of IndiaExperts believe the RBI panel recommendation for adopting monetary policy, which is centred on inflation, will be a shift from traditional policymaking.
The Reserve Bank of India (RBI) may well adopt a more hawkish stance in 2014 and likely risk hurting growth if the recommendations of a committee report on monetary policy framework are adopted. Economists and central bank watchers believe the recommendations by the committee, led by RBI deputy governor Urjit Patel, make inflation the center point and, therefore, responses to growth slower.

At this moment, they can wait and watch for some more time. But for me, there is no chance of a rate cut at any point in time in 2014, said Samiran Chakraborty, chief economist, Standard Chartered Bank.

They are moving in the direction of inflation targeting and that is not a good thing right now, said Abheek Barua, chief economist, HDFC Bank. The committee recommends that the central bank must adopt the consumer price inflation index for policy purposes and target 4% CPI inflation. The committee has indeed given a timeframe of two years to achieve the 4% inflation target and this hinges significantly on the fiscal position of the government.

This is a medium-term kind of framework, I am not sure there should be any set targets for inflation, said Barua.

The recommendations, if implemented, would change policy-making significantly from the current traditional set-up of the RBI. For one, the central bank would finally be targeting the retail inflation, which is the measure that impacts the public rather than the wholesale price index (WPI).

The need to target retail inflation had gathered steam within RBI, after the divergence between the CPI and WPI widened sharply over the last three years. Persistent double-digit retail inflation was also blamed for entrenching inflationary expectations even as on the wholesale level, the pace of price rise was far slower. Economists said that with the CPI in focus, chances of rate hikes are more than that of rate cuts. Indeed, bond markets have already started pricing in rate hikes, with the yield on the benchmark 10-year paper rising over 10 basis points on Wednesday. The RBI is scheduled to release its third quarter policy review next week.

While many see the recommendations being swiftly adopted, some central bank watchers believe the report has a more medium-term perspective. We sense that initially, yesterday's report may not have a strong impact on the RBIs decision-making process, but can be considered as a vision document that provides a roadmap for the reform of monetary policy, said economists Siddarth Sanyal and Rahul Bajoria at Barclays Capital in a note. Economists also said it is not a given that the recommendations may be adopted completely. There is a likelihood of some dilution, particularly in the case of the timeframe, maybe three years than two because we need the enabling conditions also. The onus is largely on the government for many of these conditions, said Shubhada Rao, chief economist at Yes Bank. Implementing all the recommendations of the committee will be a challenge, owing to the extent of reform required from the governments end, economists said. The committee wants the government to adhere to the targets of fiscal deficit under the Fiscal Responsibility and Budget Management (FRBM) Act. It has also recommended elimination of administered prices.