The first monetary policy in this new fiscal year had a different preoccupation, by some accounts, an interesting pre-occupation! Pre-policy consensus among economists and the markets was that there were going to be no rate cuts this time.
The first monetary policy in this new fiscal year had a different preoccupation, by some accounts, an interesting pre-occupation! Pre-policy consensus among economists and the markets was that there were going to be no rate cuts this time. All eyes were on how the RBI would view the excess systemic liquidity and what actions they would take.
Even before demonetisation, liquidity was more than comfortable, but the ‘surgical’ action led to a huge increase in bank deposits, raising the liquidity to an abundance of ~Rs 5 trillion in March, while the stated objective was to keep neutrality in liquidity (Rs 1 trillion approximately). The banks recorded a multi-decade low credit offtake (growth is in the single digits) during the previous fiscal year. Excess liquidity in the system was not in sync with the maintenance of neutral liquidity. The question this time was not so much, will the rates go down, but whether the RBI felt that the liquidity was a threat to desired monetary outcomes.
The sea of liquidity posed a challenge on the inflation and currency management fronts, apart from blunting actions on the rate front. In fact, the impact of the abundance of liquidity was acutely felt by exporters. The RBI’s dilemma was evident as an intervention in the currency market meant more INR liquidity, compounding the issue.
How the RBI viewed this situation was of importance to all of us. Did the RBI feel that as people got to withdraw cash from bank accounts, the liquidity would moderate? Or would the RBI say that the liquidity has undergone structural changes that required drastic measures including raising the CRR, and the draining of liquidity through new instruments like BDF? The views and stance of the RBI on liquidity therefore had relevance to markets, as that would indicate the RBI’s forward looking mind on inflation, yields and currencies.
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The RBI had the task of navigating the sea of liquidity and reaching a safe harbour. That meant that liquidity draining efforts should not hurt the MSMEs, who face the drought in terms of adequate and timely credit. As we all know MSMEs tend to fall first and rise last in a crisis. It is clear that the central bank should ensure their survival for sustainable economic growth.
The tenet for inclusive growth is that access to credit is not only a privilege for the classes, but also a right for the masses, as institutional support is key to India’s entrepreneurship remaining alive and kicking. The RBI has avoided any drastic measures on draining liquidity and has stuck to time tested tools for management. The worries on collateral damage on language and tools have abated and that is comfort for the markets.
The monetary policy comes on the heels of data prints showing the Indian macroeconomic outlook is looking positive – demonetization effects are petering out, Indian GDP continues to grow at 7.1% in 3Q, F17. The health of India’s manufacturing sector improved for the third straight month in March. India’s manufacturing PMI in March accelerated to 52.5 from 50.7 in February led by a sharp upturn in new business inflows.
Export in the previous fiscal (up to February) grew at 2.52% and the trade deficit narrowed sequentially to US$ 8.9bn in February. To blot the book, inflation played truant: The WPI based inflation is at its 3 year high in February, and CPI based inflation bounced back in February 2017. Food inflation also firmed up to 2.01% in February, from just 0.61% in January.
The transmission of past RBI rate reductions is only partially done and markets will hope that this unfinished agenda will be completed. Granted the problem of PSU banks’ balance sheet with high NPAs is live. Also granted, the writing off of agri loans vitiates the banks’ mindset, making them reluctant to underwrite credit on fear of moral hazards. However, the remedy is not in denying credit in general but in setting up an objective system of credit underwriting. Hence my point is that liquidity and NPA fears need to be addressed, without harming small industry and business which foster economic growth.
The big positive in this policy is banks being allowed in REITs, INVIT. This should improve banks’ investment in infrastructure. However for auto loans, the pricing outlook remains neutral,but I do hope the head room available to banks will be leveraged to reduce rates for the ultimate consumer in short order.
(The author is CFO, Mahindra Group)