An extended pause

More clarity is needed on the Paytm issue

The six-member monetary policy committee (MPC) of the Reserve Bank of India (RBI), unsurprisingly, kept the policy repo rate and stance unchanged in the first meeting this calendar year. The policy repo rate thus remains at 6.5 per cent. The rationale for maintaining the status quo is clear. The MPC intends to bring the consumer price index-based inflation rate closer to the legally mandated target of 4 per cent on a durable basis. The rate has been above target for a considerable period. For instance, after moderating to 4.9 per cent in October 2023, it again increased to 5.7 per cent in December. While the core inflation rate came down to a four-year low of 3.8 per cent in December, it’s the volatility in food prices that has kept the headline rate above target.
 

The MPC expects the headline inflation rate to average 5.4 per cent this financial year. It, however, expects the rate to moderate, on average, to 4.5 per cent in 2024-25, which will be close to the target. The risk to the projection can emerge from at least two sources. The first is, of course, food prices. Although rabi sowing has improved, potential adverse weather shocks and lower reservoir levels could affect output in the near term. Second, the ongoing disruption in the Red Sea area and geopolitical tensions in West Asia could affect supply chains and increase price pressures. Aside from some of these risks, the central bank seems comfortably placed. The cumulative rate increase of 250 basis points in the current cycle is still working through the system, which should help bring down the inflation rate. The RBI is also actively managing liquidity conditions to attain monetary policy goals.

Strong growth in the Indian economy gives the central bank policy space to focus on inflation management. Gross domestic product is expected to grow 7.3 per cent this financial year, and the MPC expects the Indian economy to grow at 7 per cent in 2024-25. The risks on the external account are also muted at this stage. Inflation in advanced economies has come down considerably. While the financial markets are speculating when the US Federal Reserve will start cutting interest rates, the possibility of more rate increases is certainly off the table. Given the expected capital flow, the management of external accounts should not be difficult in the foreseeable future.
 

In view of the clarity on the monetary policy path, the top management of the RBI did well to answer questions related to Paytm Payments Bank Ltd (PPBL) in the post-policy press conference. The RBI had disallowed PPBL from taking on board new customers because of alleged non-compliance with regulatory requirements in March 2022. It has now also stopped PPBL from taking deposits or other credit transactions in various instruments after February 29. Although there have been reports in the media, not much is still known about the exact nature of compliance issues at PPBL. The top leadership of the RBI explained that the supervisory action had been taken after persistent non-compliance and such actions are taken following comprehensive bilateral engagement with regulated entities. It thus appears that PPBL failed to meet regulatory requirements for a considerable period, forcing the regulator to take action. While the future of PPBL hangs in the balance, the RBI must ensure that customer inconvenience is minimised. Next week the regulator will come out with an FAQ, which should give more clarity on the issue.