Informist, Thursday, May 5, 2022
--Bank source: Going ahead, must see each RBI action independently
--RBI to be cautious on policy actions
--Next RBI move mustn't be related to last rate hike
--If CPI stays high, RBI has to be ready for any exigency
--Next RBI action contingent on macro-econ, global cues
--If war ends soon, RBI would prefer to stay accommodative
--RBI keen to stay accommodative to support growth
--Inter-policy MPC meet gave RBI time to space out action
--RBI keen to avoid cold turkey approach on policy
--RBI not fixated on liquidity withdrawal quantum
--$11 bln of RBI FX forwards matured in end-Apr
--Dlr/rupee, sell/buy swaps not a good option right now
--CRR hike seemed best option to suck out surplus funds
--RBI intends to move towards real rate becoming zero
--RBI not keen on taking large policy steps
--RBI would like to space out policy actions
--RBI policy approach is one of gradualism
--Apr MPC meet acclimatise mkt to new CPI-GDP dynamics
--RBI policy focused on domestic economy
--RBI policy action may impact some short-term growth
--RBI policy to lead to medium- to long-term growth gains
--Daily absorption at RBI's LAF at 6.5 trln rupees
--RBI still supporting sectors impacted by COVID
By T. Bijoy Idicheriah
MUMBAI – Uncertainty on the global geopolitical front and the supply disruptions it has led to mean that the Reserve Bank of India will be extremely cautious when it unwinds its COVID-19 measures, and each action must be seen independently of the previous measure, a banking industry source told Informist.
On Wednesday, in an unexpected inter-policy meeting, the Monetary Policy Committee announced a 40-basis-point increase in the repo rate to 4.40%, and the Reserve Bank of India raised the Cash Reserve Ratio rate by 50 basis points to 4.50%.
"The next RBI policy move is not related to this move (Wednesday's rate actions). It will be taken on the merits of its own macroeconomic conditions. But it has to be independent of this move," the source said.
On Wednesday, RBI Governor Shaktikanta Das indicated that the 40-bps repo rate hike must be seen as a reversal of a cut in repo rate of the same quantum in May 2020, at the height of the pandemic.
This effectively means that another 75 bps of repo rate cut done in March 2020 to tackle the COVID-19 pandemic could be done even as the RBI maintains an accommodative stance with focus on withdrawal of accommodation.
This is especially true as the inflation-targetting Monetary Policy Committee runs the danger of failing in its task to prevent inflation from staying over the upper band of the 2-6% band for three consecutive quarters.
As retail inflation hit a 17-month high of 7% in March, and average inflation in Jan-Mar exceeded 6%. And it is expected to stay elevated in April due to supply problems increasing from crude oil to other commodities such as edible oils, wheat and other grains to name a few.
The off-cycle action on Wednesday enables the RBI to space out its policy actions rather than take a cold turkey approach, the source said. The off-cycle actions enable moving the policy rate and liquidity conditions towards where they were before the pandemic, and also help minimise the pain to the economy from a sharper and larger action, the source added.
Not acting off-cycle would have left the RBI with only the June and August policy reviews to react to evolving inflation, the source said.
"The least RBI can do as indicated very clearly in its stance is to withdraw the accommodation. Now the withdrawal of accommodation does not refer to liquidity alone. It also refers to reversals of the policy rate drops that we did in the pandemic time."
The only reason to not move to a neutral stance is that it would have been interpreted as the RBI indicating a pause in its measures, which was not the intended signal at this point.
The overall intent is to move towards a situation with the real rate becoming zero, which could happen with a hike in policy rates and also a corresponding decline in inflation levels, the source said.
BABY STEPS
The RBI wants to take a baby-steps approach to the withdrawal of accommodation, and is not fixated on any quantum or timeframe for withdrawal of liquidity, even though it has already begun the multi-year journey.
At this point of time, after successfully concluding $10 bln of dollar/rupee sell/buy swaps, the situation was not optimal right, while open market operations would not stand up as a logical choice for liquidity management at this point. In such a scenario, the hike in Cash Reserve Ratio was the most optimum choice for dealing with excess liquidity in the system.
The source pointed out that average daily absorption in the Liquidity Adjustment Facility was still 6.5 trln rupees.
"RBI is not interested in large measures. RBI is interested in spreading out their measures as much as possible... The RBI wants to be a baby steps(-taking) central bank," the source said.
The intent will be to closely track developments across the globe and take an approach of gradualism when considering what the next policy action should be.
The source warned that the RBI was keen to have its hands untied if inflation was expected to remain well above the acceptable threshold levels.
WAR EFFECT
Russia's invasion on Ukraine had been the key factor that emerged between the February and April monetary policy, and the RBI felt that the April policy review should look to acclimatise the markets to the changed inflation and growth situation, rather than shock them with policy actions, the source said. This is why the inflation projections were raised by 120 basis points while growth projections were cut by 60 bps just two months after they were announced in February.
The source said that the RBI had intended to remain accommodative and only focus on inflation when the Russian invasion on Ukraine and other global developments, led to a sudden increase in domestic inflation, and with inflation near 7% in March, the inflation-targetting central bank had to step in with monetary policy action.
By changing the wording of the monetary policy stance and stressing that the period of ultra-accommodation was over in April, and now the focus would be on containing inflation and withdrawal of accommodation, the RBI was trying to prepare the markets for reversal of COVID-19 pandemic measures, including rate actions.
Even now, the RBI is aware that its policy tightening could negatively impact some short-term growth but believes it will engender more durable growth in the medium to long term. This is why even now, those sectors which remain impacted by COVID-19 measures continue to receive fiscal and central bank policy support to enable them to return to the growth path. End
Edited by Avishek Dutta
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