Balancing growth & inflation vital: Jaideep Khanna

Policy view from CEO, country head, Barclays India

The Reserve Bank of India (RBI)’s decision to raise the repo rate while easing the MSF (marginal standing facility) is in line with market expectations. Restoring the MSF rate to 100 basis points above the repo rate marks an important step towards unwinding RBI’s “exceptional liquidity-tightening measures” initiated in July and normalisation of the policy rate corridor. Moreover, enhancing banks’ term repo borrowing limits would boost liquidity, reduce banks’ borrowings under the MSF window and help near-term interest rates soften to an extent.

As expected, the central bank maintained its focus on inflation with a repo rate rise. However, this hawkish stance, together with the weak fiscal health of the government, could add further downside to the already-lowered FY14 growth expectation of five per cent. If RBI continues with its elevated interest rate trajectory and fiscal compulsions constrain government spending in the coming months, the weakness in the economy, already widespread and including a few usually resilient sectors such domestic services and private consumption, could be further deep-seated.

On the regulatory front, RBI’s decision to give the wholly-owned subsidiaries of foreign banks near-national treatment is a big positive and demonstrative of the central bank’s seriousness in further reforming the financial sector. We look forward to the fine print that would be out in the next two weeks. RBI’s proposal to allow banks to offer partial credit enhancements to corporate bonds is constructive and would likely boost depth and liquidity in the corporate bond market. However, from a bond investor’s perspective, allowing partial guarantees might have been a simpler approach, rather than the indirect means suggested. The detailed policy guidelines should, however, throw more light on this. Of late, the collaborative efforts by the government and RBI have been very effective in bringing back stability in the rupee. We need the same collaboration in striking an optimal balance on the growth-inflation dynamics.
Jaideep Khanna
CEO & country head, Barclays India