The Reserve Bank of India (RBI) on Tuesday decided to keep policy rates unchanged and said that it has not factored in the implementation of the 7th Pay Commission in its inflation projection of 5% by March 2017.
The Reserve Bank of India (RBI) on Tuesday decided to keep policy rates unchanged and said that it has not factored in the implementation of the 7th Pay Commission in its inflation projection of 5% by March 2017. In an interaction with the media, governor Raghuram Rajan said the pay revisions will impart upward momentum into the inflation trajectory for a period of one to two years. Excerpts…
On inflation and effects of 7th Pay Commission
Since September, we have had some information on the pay commission awards and we have to see how it is implemented and who implements it, including the centre and the state and also the time. There are some aspects of the pay commission that we can look through some we cannot and over time as the award is actually put in place we will see and be able to give you more information on that. However, the implementation of the 7th Central Pay Commission award has not been factored in to the projections and will impart upward momentum into the trajectory for a period of one to two years.
Broadly, I don’t think it is there to read that we have become more hawkish over time and I think the positives are balanced by the negatives. There has been some downward movement in oil prices, but at the same time, we need to look for some risks which could also pull inflation down such as a good monsoon next year. Of course, I think there is a lot of speculation that after two bad monsoons you are more sure to get a good one. I should leave that to the meteorologists to figure out. Nevertheless, there are some downside risks as well as some upside risks.
On availability of adequate liquidity
Our measure of whether there is enough liquidity is to see whether to see the rates in the call money markets are broadly in line with the policy rates and the evidence is that they are. Now certainly, because of a variety of aspects, the amount of lending we are doing in the market through facilities has increased to offset some of the shortages for a variety of reasons. But we are supplying that liquidity to the market. So to argue that an enormous amount of liquidity shortage at this point is not consistent with the facts. However, we also take a view on the difference between the short-term liquidity needs because of seasonal build up of government balances and long-term liquidity needs which come from the need to expand the RBI’s
balance sheet at a steady pace. We are looking into what those means for the instruments we use. While in short-term liquidity needs we use more short-term instruments, in long-term liquidity needs we use open market operations, currency reserve management and so on. We will look at the emerging liquidity needs and use all instruments to manage those.
On G-sec yields and factors which influence it
You must remember that G-sec yields depend on a confluence of factors. First, it depends on when one is tracking the G-sec yield. Remember, anticipation of a cut comes in much earlier than the date we announce a cut. So if you look from the middle of 2014, G-sec yields have come down significantly since then. So how much of the policy cuts in 2015 were anticipated and how much were not does matter. If there was some anticipation then it was factored into the falling G-sec yields.
But G-sec yields are not just about policy. Obviously expectations of inflation do come in and I believe expectations have fallen over time. But other aspects also have an influence. For instance, the supply and demand for G-secs at a particular point of time do have some effect. To that extent, issues of liquidity and available purchasing institutions do matter.
On rise in stalled projects
If you look at the centre for monitoring Indian economy (CMIE) data for stalled projects, it looked like it was coming down steadily. And what has happened in the last couple of quarters, it seems to have started picking up again. That is a source of concern as the steady improvement we had seen seems to have been halted. Now the government is taking measures to again reduce the stalled projects, Prime Minister, finance minister, and minister of state for finance are all engaged and hopefully we will see it come down once again.