Monetary policy review: Challenging the status quos and dilemmas

The decision to pause and keep the stance unchanged by the Reserve Bank of India (RBI) was largely along the expected lines. Beyond such a move, we believe the policy is a reflection and open communication of the RBI’s penchant to anchor the multiple growth drivers domestically, while remaining sanguine and uber mindful of heightened uncertainties globally whose pass-through impacts are well understood. 
 

With the Monetary Policy Committee (MPC) clearly flagging the serious re-rise of known drivers of uncertainties and prolonged geopolitical tensions, there is no ambiguity as far as its interpretation on withdrawal of accommodation is positioned. 
 

While seasonal anomalies in sowing pattern and an unpredictable rainfall intensity/pattern across states along with lower area sown under pulses, dip in reservoir levels, El Niño conditions and volatile global energy and food prices are playing with the significant movers of headline inflation, beleaguered crude prices need to be watched carefully (notwithstanding their gyrations both ways). A slight downward revision for the third quarter inflation projection is on the back of vegetable price correction and the recent reduction in LPG prices. Inflation should remain largely range bound in the coming months (5-6 per cent).
 

The growth projection remains at 6.5 per cent in the current financial year as domestic macro conditions are expected to benefit from the sustained buoyancy in services, revival in rural and urban demand (likely traction due to onset of festive season), consumer and business optimism, and government’s thrust on capex duly imbibed in private participation. 
 

Given the changing facades of liquidity, as the demand for liquidity has turned more on-tap given a 24/7 payment system while supply of liquidity is a constellation of several autonomous factors including the government surplus cash balance and foreign flows (say, inclusion in bond index) RBI has to delicately manage the liquidity. 
 

We understand that the RBI leaning for open market operation (OMO) sales as a preferred option is, to attenuate any transient liquidity build up in the system given the surfeit of Government cash balances coming back with the Government likely to accelerate spending. The bond market participants need to understand this fine dichotomy of transient liquidity and permanent liquidity as any undue reaction could set off volatility in bond markets (yields jumped by more than 10 basis points after policy announcements). 
 

In principle, thus, there is an extension of policy quadrilemma (capital flows, a fixed exchange rate and an independent monetary policy, financial stability) to policy pentilemma with frictional liquidity management emerging as the overarching objective in influencing the smooth conduct of monetary policy in India.
 

On the regulatory front, smoothening the friction points in infrastructure projects can quench the humongous needs on this front, proposed revision of IRAC norms likely to invigorate incremental flow of funds from regulated entities where many unconventional significant players are joining the league to ensure timely dispensation. Harmonising credit risk transfers under LEF across two lower strata of NBFCs should be a confidence building measure for the sector while incentivising select UCB’s through enhanced gold loans will promote other such lenders to follow suit. Omnibus SRO framework for entities regulated by RBI assumes significance due to renewed focus on data protection. Including Vishwakarma scheme under PIDF and introducing CoF token creation facilities directly at the issuer bank level enhance the digitisation playbook while revamping the internal ombudsman scheme for the sector should be a right step in customer grievance redressal.



 

(The author is Group Chief Economic Advisor, State Bank of India. The views are personal)