In a Credit Policy that came in the backdrop of a gathering perfect storm — mini-mayhem in global asset markets, a widely-panned Budget, and a sharp spike in local bond yields — it was the Credit Policy equivalent of a perfect yawn.
The interesting part of the Credit Policy was the vindication of the Monetary Policy Committee (MPC)’s stance in policy rates over the last one year. MPC has been under concerted attack from various quarters for not reducing policy rates while inflation went on a steady downward journey. Three quarters hence, the MPC could legitimately use that ultimate gloat — “I told you so”! Having won the intellectual debate on its stance, the Reserve Bank of India (RBI) decided to conform to the cliché — “If it ain’t broke, why fix it”? It left the policy rate unchanged at 6 per cent and the stance at neutral. As per the policy document as well as the media interaction thereafter, none of the environmental factors have changed.
The RBI flagged upside risks to inflation in the near term — primarily on supply-side factors — fuel prices driven by escalating global crude oil prices, house rent allowance (HRA) implementation by state governments. At the same time, the RBI also referred to possible mitigants to inflation — subdued capacity utilisation and depressed rural wage growth. On balance, there was enough for a firm status quo in the monetary policy stance for now.
What does the policy portend for interest rates and the broader economy? Would we see a rate hike sometime soon?
Raising its head
To start with, we have to get used to high interest rates, all over again, just about a year after it seemed we were coming out of that cycle. The fault lies not so much within (India), but outside. US treasury yields have seemingly breached a structural barrier — a fiscal stimulus (through the Trump tax plan) in the middle of multi-year lows in unemployment levels has given enough levers for inflation finally to be showing up. Add to it a coordinated global economic recovery, and global yields are likely to remain biased towards the North than the South. Then there is a little of what lies within, i.e., oil prices — sticky and rising global crude prices provide an ever-present risk to Indian inflation.
Having established the “tough” status quo, the RBI has left enough undertones of “love” in its commentary. So, while near-term expectation on inflation is higher (5.1-5.6 per cent for the first half of the fiscal year 2018-19), the second half is sharply lower (at 4.5-4.6 per cent). The policy document also put out a narrative that would seem more like North Block than Mint Street — “the nascent recovery needs to be carefully nurtured and growth put on a sustainably higher path through conducive and stable macro-financial management”. The “on one hand, X, on the other hand, Y” act has been accomplished with a fine touch!
RBI also has other tools to stabilise the bond market — open market operations (OMO) and fresh FPI limits on investment into debt markets. While the usual stance on OMO is about managing liquidity and volatility, rather than provide “RBI support” to bond markets, it is a tool that is never too far away in case markets get too jittery.
Moderate growth recovery
At a conceptual level, under the new MPC construct, the RBI is yet to carry out a rate hike. And the bar for the first has now been set fairly high — leaves enough on the table for bond investors to feel comforted, even they won’t be jumping in joy. An interesting take-away from the monetary policy is the congruence of views on economic growth between the RBI and the government. The RBI pegged GVA growth at 6.6 per cent for the current fiscal, which is tantamount to a GDP growth estimate of 6.7-6.8 per cent, bang on with the estimates of the Economic Survey. For FY19, the RBI projects a GVA growth of 7.2 per cent, which would translate to a GDP growth of 7.4-7.5 per cent — again broadly in line with the Economic Survey.
It’s not exactly reading the tea leaves to therefore discern that the RBI is comfortable with the growth recovery being sustained at current levels of interest rates. It is also quite evident that the central bank isn’t in a lot of hurry to don the mantle of a super-hawk, having burnished its inflation credentials through the fire of low inflation for nearly a year. All of which gives enough confidence for market readers to place their bets on predictable premises — moderate growth recovery and stable, though high, levels of interest rates.
The writer is Managing Partner Head – Investment Advisory & Strategy, Products and International Business, ASK Wealth Advisors