Gokarn hints at reversal in policy stance

The Reserve Bank of India’s (RBI’s) next policy move is likely to indicate a shift in stance, newly-appointed Deputy Governor Subir Gokarn has said.

“The next move, whenever it comes, will indicate a change, but when it will come I don’t know,” Gokarn said.

Gokarn, however, said it was a wait-and-watch situation for the January policy review.

“At this point, we will have to see export numbers between now and then and all of that will be taken into account when we formulate the policy. It is wait-and-watch for a clear position. There is some signal through the SLR (Statutory Liquidity Ratio) hike, but you could interpret it as the position has stabilised,” he said.

On October 27, the central bank had hiked the SLR to 25 per cent in its mid-term review of the 2009-10 (April-March) Annual Monetary Policy. The hike was an indication of RBI starting to exit its loose monetary policy. Commenting on the surge in capital inflows, Gokarn said it tended to impact RBI’s ability to suck out liquidity.

“You could also see them (capital inflows) as potential destabilisers in the context of external flows as we saw in 2006-07 (April-March). Large capital inflows tend to upset the central bank’s ability to withdraw liquidity,” he said, adding the RBI will wait-and-watch and factor this into its policy response.

Foreign fund inflows into Indian debt and equity markets touched a record $19.72 billion in 2007 prompting the RBI to buy dollars to check a sharp rise in the rupee. RBI’s dollar purchases, however, added to inflationary pressures amid already high crude oil prices, complicating RBI’s liquidity and monetary management.

After huge outflows in 2008 because of global financial crisis, foreign funds have net invested $16.14 billion into Indian markets so far in 2009.

“At the moment, they (inflows) are translating into rise in equity and realty prices. Reflection of foreign inflows is a positive sign of economic recovery,” he said.

He also said at present the huge capital inflows were not a threat and the Indian economy was showing strong tendencies to recover among its peers. Asked whether food-price led inflation has been a matter of concern, the deputy governor said it has been so for months.

The inflation rate based on Consumer Price Index for Agricultural Labourers was 13.73 per cent in October, compared with the widely tracked Wholesale Price Index that was 1.34 per cent.

The divergence in the two indices is mainly on account of food prices that are currently ruling high, and have a higher weightage in CPI.

Commenting on the sharp rise in economic growth during July-September, Gokarn said the stimulus given by the government reflected in the data.

The Indian economy expanded 7.9 per cent in July-September, the second quarter of 2009-10, compared with 7.7 per cent a year ago, and 6.1 per cent in April-June.

“The numbers are better than expected...the important thing to be recognised is that government spending has been over 26 per cent (over last year). So while it’s that recovery is gaining strength, we’re seeing some second round effect of the Sixth Pay Commission, which was a part of the stimulus, on consumer durables.”

However, Gokarn said it was too early to forecast any change in growth projection for the current fiscal.

“It is premature to extrapolate from these numbers because Q3 (October-December) will really show us impact of monsoon on agriculture. That may take the number down a bit, but as of now we have not seen negative numbers. In Q3, I should not be surprised to see it (farm sector) go down.”