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    Good afternoon. Today we have Dr Subir Gokarn, Director of Research, Brookings India for a special chat on the RBI's bi-monthly Monetary Policy review. Welcome, Dr Gokarn


    Good afternoon, everyone

  • A

    A P PATI

    Considering the political logjam, should the RBI cut policy rates at this juncture?


    I don't think the logjam in and of itself should enter the policy consideration. If one of its consquences is that inflation risks are heightened because some supply side measures may be delayed or stalled, this may offset the downside risks to growth that you are presumably basing your question on.

  • A


    The RBI at its policy meet today has projected inflation lower by 0.2% for Jan-March and risks are balanced for its target of 6% in January 2016. Even if inflation remains under control for August and September on the back of easing crude oil prices and normal monsoons, will the US Fed stance on interest rates be the key for the next rate cut?


    It will be a factor, unquestionably. This is indicated in the statement as well. The rationale is that a cut will encourage equity inflows, which will offset a potential outflow, particularly from debt investments. But, it is only one factor in the decision. Inflation dynamics will obviously be the dominant factor.

  • R


    With Fed's tightening imminent in the month of September, which will result in turmoil in the global markets, is India prepared to handle a possible outflow of foreign money? What could be the RBI's stance in the forthcoming monetary policy meet?


    India currently has a relatively low vulnerability to a Fed rate hike, because the current account deficit is relatively low. I think India will be one of the least affected markets by a hike, whenever it comes. If there is turbulence, I think there is enough capacity to manage it, both in terms of reserves to contain rupee volatility and the space to cut the repo rate, which will presumably attract equity inflows.

  • J


    How do you read Governor Rajan's statement on the controversy surrounding the monetary policy committee. Do you think he has made it clear that the institution should remain completely independent and the Governor should be the final authority on interest rates?


    I think the debate on this needs to focus on what is best for the economy in terms of the efficiency of the inflation management process. A committee structure reduces the risk of either a maverick governor or a pushy government. The composition of the committee must be consistent with this objective. My own view is that equal internal and external representation with a casting vote for the governor is the best arrangement, presuming that this power will be used sparingly. But, whatever the arrangement that finally emerges, it will not work in an environment of mutual suspicion.

  • T


    Global and domestic investors are beginning to question Governor Rajan's rationale behind holding rates. Is the governor losing his sheen and credibility among the investing community?


    That is something only someone from that community can answer! But, from an analytical perspective, while one could disagree with the decision, the rationale provided by the RBI also has to be assessed dispassionately. In this case, the primary motivation appears to be "keeping the powder dry". There is obvious concern about the weakness of transmission of lower policy rates by banks - 75 bps to 30 bps. The question is whether this is going to be a persistent weakness, in which case, other than the policy rate, the RBI has to explore ways in which transmission can be improved in the short term.

  • A


    What kind of rate cuts are likely for the rest of FY16, going by macro fundamentals?


    Going by the inflation forecast of 6%, and the premise that we need a real policy rate of 1-1.5 per cent, at best, there seems to be room for a 25 bps cut this year. If the forecast is scaled down in the next review in October, by which time the food inflation scenario will be clearer, that could create some more room for cuts.

  • A


    Given the Governor's angst over non-transmission of 3 rate cuts so far, what can the RBI actually do to ensure that these are passed on, besides gently nudging the banks?


    This is the fundamental question! We are seeing the disadvantages of a bank-dominated system when it comes to monetary transmission. We must have a robust g-sec market as an alternative channel, so that interest rates with varying tenors and risk factors have a uniform basis. Nudging banks will only take us so far; using the g-sec market more effectively is an important part of a structural solution. The RBI needs to focus on this objective. The key to this, in my view, is to eliminate the mark-to-market exemption provided to the SLR portfolios of banks. I've laid out the logic for this in a BS column of mine sometime last year.

  • L


    What happens if crude oil goes up by $10 this year? Will we see inflation going up a lot?


    It will go up a bit, but I don't think it will be a very significant impact. Pricing power is still relatively low given our level of capacity utilization, so producers will probably absorb this magnitude of increase.

  • A


    It is pretty clear that all the industrialists are waiting for rate cut to borrow for field expansion. Unless RBI cuts rate, the businesses are not going to borrow, it is as simple as that. That will restrict production and in turn limit supply. The Agri/off inflation just can not be controlled by Monetary policy. A common man is not going to splurge on food if RBI cuts rate by 50 bps. It amazes me what is stopping RBI from cutting rates?


    Whether one agrees with a specific decision or not, it is important to appreciate the logic underlying it. In this case, a combination of some upside risks to food inflation and weak transmission have been provided as justifications for not cutting. As regards the former, while it is true that interest rates may not directly impact food prices, these prices certainly feed through into heightened inflationary expectations, so monetary policy has to respond. On transmission, ultimately, borrowers pay what banks charge. If banks are not lowering their rates, the RBI cut is wasted.

  • J


    Whether the new formula for calculating GDP rates (and resultant higher GDP growth numbers) has altered or affected RBI's monetary policy?


    The RBI's assessment of growth is really in terms of the "output gap", or the difference between actual and potential growth. The revision in the actual numbers should also translate into a revision of the estimated potential growth rate. Even if this not very explicit at this point, it is entirely possible that the higher actual growth rate still puts the economy in roughly the same position on the business cycle - i.e. below potential - as the old number. If so, the number per se should have no impact on the RBI's decisions.

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