The opening lines of Reserve Bank of India Governor Shaktikanta Das’ Monetary Policy Committee (MPC) statement today, vowing to position the RBI as a model central bank of the Global South, promises an interesting proposition — could central banks be the new public good bridging the gap between various strata of society while fortifying the financial markets against shocks and surprises? Interestingly, recent State Bank of India research using the Banker-Charnes-Cooper model shows that the RBI has been among the top three most efficient central banks — much higher than the Fed — in containing inflation following the Russia-Ukraine conflict.
The decision of the MPC to keep the policy rates intact while remaining focused on withdrawal of accommodation to ensure inflation progressively aligns with the target met with a majority of 4-2 vindicating the stand. The divergence assumes importance, given that the European Central Bank adopted a pivot the day before yesterday (joining select nations from the European Union and Canada), its first after 2019, initiating a 25 basis point rate cut with a non-linear trajectory anticipated going forward.
Domestically, the latest GDP growth has placed the growth outlook on a firm footing. Real GDP growth for 2024-25 is projected at 7.2%, up from 7% earlier. The growth numbers could be a tad higher, especially if the Middle East softens with the reconciliatory efforts of negotiating countries, including India, and exports pick up in the merchandise category.However, a shadow of risk remains through runaway industrial metal prices, chiefly copper, that has both — a supply-side glut, and usage in new-generation technologies like artificial intelligence fuelling the uptick. With Nvidia ascending to the world’s second-most valuable public company yesterday, the demand may remain suspended in a higher zone for many metals. The reworked growth numbers for China, according to the International Monetary Fund (5% in CY24 and 4.5% in FY25), anchoring higher for longer levels does not bode well for inputs.Meanwhile, liquidity has turned into surplus in June after remaining in deficit during April 20-May 31.
However, the government is moving towards the Just-in-Time mechanism of fund transfer, whereby government cash balances have moved to RBI E-Kuber, and hence, system liquidity in the future may become agnostic about government spending. Thus, government surplus cash balances will remain an important factor influencing system liquidity, making liquidity management more complicated. Thus, it will remain one of the most critical issues during this fiscal, and the RBI may have to innovate on liquidity augmentation tools.On a separate note, past examples like during December 2016-August 2017 indicate that a change in voting pattern, as happened in this policy, ultimately leads to a change in interest rate decision, and rate cuts can be expected towards the second half of the current fiscal.
The key announcements on regulatory and development fronts include enhancing the bulk deposit limits of major banks to `3 crore and above from earlier “single rupee term deposits of `2 crore and above” brought in 2019. This move reflects the changing landscape of liquidity, as also deposit centricity for banks from savers on two aspects: substitution and competition. While the glut in raising deposits from the retail book has forced many banks to increasingly opt for wholesale deposits, the savers themselves are split between alternative, competing channels of investments with diminishing opportunity cost. The flexibility offered to major banks as well as small finance banks (who have already been offered a glide path to convert into universal banking avatars) will imbibe better visibility on the asset and liability management front. Colloquially, this could also hint at either bank lending rates remaining higher for longer (than earlier anticipated) or the net interest margin of banks retracting once a benign rate cycle begins.
The RBI also decided to rationalise guidelines on export and import of goods and services in line with the changing dynamics of cross-border trade. Changing dynamics of trade include rising digital trades, technology, free trade agreements, and regional trading blocs, which require a review of guidelines.Rising incidences of frauds has been a matter of concern, occuring predominantly in digital payments. In terms of value, frauds have been reported primarily in the loan portfolio (advances category). Accordingly, the RBI decided to form a committee to explore the possibility of creating a Digital Payments Intelligence Platform that will harness advanced technologies to mitigate payment fraud risks. Furthermore, the third edition of the RBI’s global hackathon, “Harbinger 2024”, will be launched with two overarching themes, “Zero Financial Frauds” and “Being Divyang-Friendly”.
On the payment side, the RBI has extended the facility of standing instruction on per-paid instruments such as FASTag and UPI Lite. The idea is to provide an auto-replenishment facility to the customer and avoid repetitive transactions.The RBI’s post-pandemic monetary policy conduct reminds us of former Fed chairman Ben Bernanke’s comment that “constrained discretion” rules achieve the desired objective of monetary policy better than a strict rule-based approach. Constrained discretion is an approach that allows monetary policymakers considerable leeway in responding to economic shocks, financial disturbances, and other unforeseen developments, but constrained by a strong commitment to keeping inflation low and stable.
The RBI has been remarkably nimble with such constrained policy discretion since the pandemic.In this context, I will make a limited point from an academic perspective regarding the recent RBI draft circular on provisioning of project finance in construction phase.Based on available data, out of 1,873 central projects under construction, 779 are delayed with respect to their original schedules and 253 have reported additional delays vis-à-vis their date of completion reported in the previous month. Then average length of the construction phase can range from 63-411 months. The average cost overrun is 18.65%, which varies from sector to sector. As a broader conclusion, the straightjacket rule of 5% may be thus looked at in greater detail like a “constrained discretion”, as often used in the sphere of monetary policy making.
Soumya Kanti Ghosh, Group chief economic advisor, State Bank of India. (Views are personal)