The evolution of Urjit Patel as RBI governor
The Reserve Bank of India’s (RBI) first bimonthly policy of the current financial year in April projected average inflation of 4.5% in the first half of fiscal 2018 and 5% in the second half. Two months later, on Wednesday, it pared its inflation projection substantially—to a range of 2-3.5% in the first half of the year and 3.5-4.5% in the second half. Despite this, RBI has not changed the stance of the policy; it has remained neutral even though the tone of the policy has changed from hawkish to dovish.
Will the lower inflation projection ensure a rate cut in the next policy announcement in August? The monetary policy statement as well as the post-policy press conference, addressed by governor Urjit Patel and the four deputy governors, beside one member of the monetary policy committee, did not provide a straight answer. Theoretically, future actions will be data-driven but there is no clarity whether the Indian central bank will cut the policy rate if the inflation trajectory conforms to its projection or will prefer to wait till inflation undershoots it projection.
I presume it will cut the rate only if the inflation trend is lower than its projection. The market believes that RBI is being over-cautious and the year-end retail inflation could be around 4%, lower than the central bank’s projection of 4.5% (the upper end of the band) and in sync with RBI’s medium-term target for retail inflation (4% within a band of +/- 2%).
Before the August review of the monetary policy, RBI will have May and June inflation figures on the table. Analysts estimate the May retail inflation figure around 2.25% and June, around 2% or even less. If indeed that’s the way the retail inflation scenario pans out and the monsoon trajectory is favourable, we can expect a rate cut in August. This is what explains the rally in the bond market on Wednesday after the policy announcement.
The February policy signalled the end of the easy money regime which started in January 2015. During this period, RBI cut its policy rate by 1.75 percentage points in stages. In the April policy, it adopted a distinctly hawkish stance and one of the member of the monetary policy committee was even in favour of a pre-emptive 0.25% hike to achieve its 4% inflation target but he voted for holding the policy rate unchanged and preferred to wait for more data.
Despite paring its inflation outlook, RBI has not let its guard down. It still sees “evenly balanced” risks and says the spatial and temporal distribution of the monsoon and the government’s food management will actually define the risks. The other risks to inflation listed by the Indian central bank include fiscal slippages arising out of large-scale farm loan waivers across Indian states and the disbursement of house rent allowances under the 7th central pay commission’s award. It, has, however, ruled out any adverse impact on inflation following the implementation of the goods and services tax.
The point to note is that the monetary policy committee is aware that the upside risks to inflation are lower now than what they were in April but still it refrained from a rate cut as a “premature action at this stage risks disruptive policy reversals later and the loss of credibility”. It has not shifted its policy stance to accommodative but a neutral stance means it can cut the rate if the incoming data are favourable.
While five members were in favour of the monetary policy decision, one—Ravindra H. Dholakia—was against it, says the RBI policy statement. This means Dholakia favoured a rate cut. This is the first instance of an MPC decision not backed by consensus. Another interesting takeaway has been Patel’s answer to a journalist’s question at the post- policy press conference. On being asked why the government called for a meeting of MPC members and whether this doest not affect the independence of the committee, Patel’s straight answer was, yes, they had been called by the government, but all of them declined to attend the meeting.
This statement and his call for paring the administered interest rates on small savings to be in tune with market rates and recapitalization of state-owned banks make it clear that as RBI governor, Patel has started asserting himself slowly but surely.
Tamal Bandyopadhyay, consulting editor at Mint, is adviser to Bandhan Bank. He is also the author of A Bank for the Buck, Sahara: The Untold Story and Bandhan: The Making of a Bank.
His Twitter handle is @tamalbandyo.
To read Tamal Bandyopadhyay’s earlier columns, click here.