RBI is not in an enviable position when the Global markets dynamics are explosive, divergent and complex. RBI took comfort in 2015 from CPI trend down to sub 5%, Brent Crude below $35 and abundant FPI appetite extending Rupee stability. RBI had the luxury of buying dollars to retain sufficient system liquidity to keep short term rates low. RBI took care of long term investors keeping the long term bond yields steady despite delivery of 1.25% rate cut in 2015. The unexpected 50 bps rate cut on 29th September 2015 was seen as the trigger point for establishment of sustainable bull trend into 2016 and beyond. While there is debate on the need of ultra-dovish stance in September ahead of FED preparedness for shift to rate hike cycle between October-December 2015, things turned against RBI supportive stance post wash out of monsoon and winter sessions of Parliament, thus delaying the big-bang policy initiatives of the Government. In all, through most of 2015 there was better comfort on India macroeconomic fundamentals diluting growth-inflation conflicts which was serious deterrent to RBI growth supportive policy stance. But for the push from the Government, Dr.Rajan would not have turned ultra-liberal on policy rates in 2015 retaining operating Repo rate at 7-7.25%.
Come 2016, hell broke loose on global markets - lots have been said on these bolt from the blue and supportive manna from the heaven. Bottom-line for India is not positive, least to say. The external supportive tailwinds from lower Brent Crude, abundant FII flows and FDI euphoria on India opportunities are slowly being pushed behind. It's more than 20 months since set up of NaMo euphoria in May 2014, but nothing tangible is seen on the ground. The worry is from extended "work-in-progress" mode. The outlook on India macroeconomic fundamentals has deteriorated since mid 2015. The growth momentum is in struggle at lower end of 7-7.5% par zone; fiscal deficit is under pressure at higher end of 3.5-4% comfort zone and CPI inflation is up at 4-6% tolerance zone. It gets worse when Rupee gets slaughtered from 58-63 to 67-70 in quick time. Given these dynamics in play, it is not sensible (and prudent) to expect RBI to keep pumping monetary steroids into the system through surplus system liquidity and low interest rate regime.
What to look for as take-away from RBI review? No goodies though!
RBI has too many things to worry about beyond the usual stuff around inflation, Rupee fair valuation and ensuring adequate flow of liquidity at affordable cost to desired sectors which contribute most to the growth and social well-being. RBI's top priority is now seen to be around productivity and efficiency of financial intermediaries. The concerns emerge from poor health of systemically important Banks who find it tough to absorb the impact from NPA woes and revenue squeeze. No economy can switch into higher gears when large financial intermediaries are down (and out) without capability to fuel growth through credit expansion. The Capital is also scarce and if at all, not at this valuation for dilution of equity.
RBI ring-fence of inflation and Rupee against headwind forces from fiscal and current account deficit is broken. The need is to prevent hard-landing of inflation and free fall of Rupee. RBI feels the impact will be from growth pressures (in the absence of big-bang policy reforms and low appetite from private and foreign investors), higher domestic consumption leading to high demand - low supply triggering price-push inflation momentum, and high fiscal deficit adding to pressure on liquidity and short term interest rates. Against these complexities, rate cut or CRR/SLR cut is not in the radar of RBI or even as a discussion item on the way forward agenda.
All taken, it's status-quo on headline breaking news items and the attention will be on ensuring smooth flow of liquidity rather than tinkering with the quantum (CRR/SLR) and cost (Repo/Reverse Repo rates). The agenda is to ensure smooth flow of debt for economic capacity expansion, and it can't be done alone by RBI. The usual expectation during policy review is to push RBI to walk hand-in-hand with the Government, delivering to their demand wish-list; this time RBI extend its hands to the Government to walk together to prevent hard landing of the economy. If not done, the price to pay is huge forcing RBI to follow FED after a quick rate easing cycle in 2015!
It is not panic situation as yet if prudence is placed ahead of wish! Given that the "ball" is in court of the Government, it is non-event day for RBI.
Moses Harding
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