By Vivek Iyer
The RBI Governor ended his Monetary Policy Committee Update on September 30, 2022, with a quote from Mahatma Gandhi that reflected the need for optimism and confidence in the face of adversity. In my view, this quote pretty much summed up the RBI approach going forward. The RBI MPC speech which lasted for about 40 minutes, articulated that the repo interest rate has been increased by 50 basis points with a 5:1 majority in the MPC and the reasons for the same, primarily being persistent inflation on account of the global supply chain bottlenecks driven by the ongoing geo-political conflict between Ukraine and Russia. Some of the key aspects that stood out for me were as below:
- Withdrawal of accommodative stance – RBI’s anchoring itself to this approach, signifies the high levels of uncertainty associated with the global macroeconomic environment. While it has also been recognized explicitly during the course of the speech, the reason the same stands out is that there may be a few more interest rate hikes that the market can expect in the coming quarter, which seems to be the underlying message.
- Absence of Forward Guidance – Academicians and economists know that forward guidance is a policy tool used during a lax credit cycle and never during a tight credit cycle. The fact that RBI specifically mentioned this is normalize the expectations that the market will have from the RBI on any expected guidance on their decisions. This helps soothe the volatility in the capital markets and this reflects the RBI’s focus on financial stability.
- Currency Exchange Stability is not a direct RBI objective – The RBI very clearly articulated this stand and the reason why this seemed interesting is that in my opinion, the exchange rate range band seems to have moved up from the earlier 78-80 band as the RBI doesn’t seem to want to provide any assurance on whether the current levels are comfortable to them. This is an assessment that I have made based on the RBI MPC speech and the interactions that I witnessed in the RBI post-MPC press conference.
- Other initiatives – While there were initiatives also mentioned on rationalization criteria for including more RRB customers under internet banking and regulation of offline payment aggregators, the below two stood out:
- Expected Credit Loss framework for Banks – This is a significant step toward moving to the Ind-AS transition for Banks, as one of the major worries of moving to Ind-AS for Banking were the challenges in adopting Expected Credit Loss standards. This is a significant step towards standardized financial reporting which makes the Indian Banks a more lucrative investment for foreign investors, given the transparency the Ind-AS standards bring.
- Discussion Paper on the securitization of stressed assets – A framework for stressed assets beyond the ARCs will help accelerate the bad asset clean process faster and give thrust to lending activities in the economy, thereby promoting growth.
While there are challenges in terms of global macroeconomic headwinds that we face, we need to remember the fact that India continues to be a bright spot in an otherwise sombre world – a thought that was very rightly echoed in the Mahatma Gandhi quote by the RBI Governor.
(Vivek Iyer, Partner and Leader, Financial Services – Risk Advisory, Grant Thornton Bharat. Views expressed are the author’s own.)