After the Reserve of Bank India’s (RBI’s) first bi-monthly monetary policy for FY19, Governor Urjit Patel and other senior officials spoke to the media on the apex bank’s decision to hold onto the repo rate, reason to move from Gross Value Added (GVA) to Gross Domestic Product (GDP), and the difference in powers to regulate public sector banks as against private sector banks. Edited excerpts:
The policy statement talks about the impact of house rent allowance (HRA) on inflation. Can you share more details?
M Patra: In the Monetary Policy report of April 2016, we did a detailed analysis of the Seventh Pay Commission’s recommendations. Of this, the HRA component has a bearing on inflation since housing has a weight of 9.5 per cent in the Consumer Price Index (CPI). So, whatever happens to the housing sector matters to the path of inflation. Under the Seventh Pay Commission, the HRA was increased by 105.6 per cent. So the CSO would impute that number. But that is not real inflation. It is just a statistical effect that is boosting up the CPI. What we are doing is to just focus on the real underlying inflation by excluding HRA from the CPI. After this exclusion, the projection for first half comes down by at least 35 basis points. This is the full impact of HRA which started in July and peaked in December, and will wane during 2018.
Urjit Patel: Going forward, as state governments roll out their HRA revisions, we will have to be cognizant to exclude that from the CPI index to gauge the exact amount of inflation. However, if there are second-round effects on account of expectations and aggregate demand, those we will take into account.
What is the reason behind the switch from GVA to GDP?
V Acharya: In terms of the switch from GVA to GDP as the headline measure of economic activity, it is mainly to conform to international standards. Globally, the performance of most economies is gauged in terms of GDP. This is also the approach followed by multi-lateral institutions, international analysts and investors. They all stick to this norm because it facilitates easy cross-country comparisons. The CSO also has started using GDP as the main measure of economic activity since January 2015. So even though there are good economic reasons to employ GVA as the supply-side measure of the economic activity, we have decided to switch to GDP.
Through February and March, the CPI has remained low. And the RBI has projected that it will continue to be low during the next fiscal year. So, why is the policy stance still neutral?
Patel: The inflation prints for February did turn out to be softer than our projection; much of this was because of the seasonal softening of the vegetable prices that occurs during the winter months. However, the Monetary Policy Committee (MPC) looks ahead and we noted that there are several uncertainties around the baseline inflation path which is why we kept the stance neutral and the rate unchanged. First, there is the uncertainty around the revised formula for Minimum Support Price (MSP) as announced in the Union Budget (2018-19) for kharif crops. Then, there could be some fiscal slippage from the Union Budget estimates or over the medium term. There are also risks of fiscal slippages from state governments on account of higher revenue expenditure. The companies and firms that we poll in the RBI’s Industrial Outlook Survey expect input and output prices to rise going forward. Lastly, the volatility in crude oil prices has imparted a fair bit of uncertainty to the near-term outlook. For these reasons, we have maintained status quo.
Bankers have said that due to the new debt resolution framework, close to 800-900 accounts would have to be classified as non-performing assets (NPAs). Are you concerned that banks could become risk averse to lending?
N S Vishwanathan: The reasons why we introduced these revised guidelines is because we believe that the Insolvency and Bankruptcy Code (IBC) has given a framework for the resolution of stressed assets. And the developments that have been happening has given us some comfort that it will go in the right direction. The second part is that the default definition is one day, but the non-performing asset (NPA) definition still stays at 90-days. So we do not know that why this circular, by itself, should result in more NPAs. What we have, of course, done is to withdraw those schemes which resulted in banks postponing the recognition of NPAs.
Recently, the Governor spoke about the absence of regulatory powers on the public sector banks (PSBs). Of late, there have been lapses in private sector banks as well. Have there been any developments, from a regulator’s point of view, on these institutions?
Patel: Those are two different issues and they are not related. What was said in the speech and debate around it relates to the legal powers that the RBI has, which seem to be asymmetric between PSBs and private sector banks. That has got nothing to do with our supervisory and regulatory action on any bank concerned.
Have you been talking to the Centre regarding the regulatory powers of the RBI, whether you can modify them and act tough of the PSBs?
Vishwanathan: This requires amendments to the Banking Regulation Act (1949), as the Governor said the non-neutrality of the RBI’s powers come from the provisions of the Act, and that needs to be changed. The Governor has made the bank’s position very clear, there will be discussions on this with the government.