If there are multiple ways to skin a cat, then there are as many ways to read a central bank’s policy document. Broadly, central banks reveal information through statements which are plain as daylight, by scattering clues across timelines and documents so that a pattern emerges only after joining disparate dots and, finally, by embedding nuances between the lines. Interpreting central bank speak is an acquired skill. Former Federal Reserve chairman Alan Greenspan, a master of this dark art, once told reporters: “Since becoming a central banker, I’ve learned to mumble with great incoherence."
The Reserve Bank of India’s (RBI’s) first monetary policy statement for 2018-19 is a masterclass in calibrating the message. Consequently, reporting on the policy focused on three parameters: an unchanged benchmark rate, the RBI’s upbeat assessment on GDP (gross domestic product) growth (7.4% in FY19 against 6.6% for FY18) and a relieved but cautious outlook on consumer inflation (sub-5%), tempered by risks from oil price volatility and government’s plans to increase minimum support prices for farmers. But beneath these optimistic details, the RBI has shifted some of the milestones on regulatory actions, thereby betraying a heightened risk assessment and anxieties about the banking sector’s health. The deadlines have probably been deferred to provide Indian banks with some breathing space, given the challenges of ballooning bad loans, a dry capital pipeline and malfunctioning governance structures.
A few days before announcing the monetary policy, the RBI afforded banks some latitude by softening the blow of rising bond yields. The diminution in the value of bonds, and the subsequent mark-to-market losses, incurred by banks in the available-for-sale and held-for-trading categories during quarters ended 31 December 2017 and 31 March 2018, can now be spread equally over the next four quarters. It seems as if the RBI is apologizing for rising yields.
RBI’s actions stand in contrast to deputy governor Viral Acharya’s sermon at the Fixed Income Money Markets and Derivatives Association (Fimmda) annual dinner in January: “Interest rate risk of banks cannot be managed over and over again by their regulator. The regulator, in interest of financial stability…often obliges. However, the trend of regular use of ex post regulatory dispensation to ease the interest rate risk of banks is not desirable from the point of view of efficient price discovery in the G-Sec market and effective market discipline on the G-Sec issuer."
The 6 April monetary policy statement for 2018-19 deferred IndAS accounting norms, which was to be adopted by all banks (except regional rural banks). The ostensible reason is that the necessary amendment to the Banking Regulation Act, which will align prescribed accounting and reporting formats with IndAs, is yet to be passed. But, more importantly, RBI also lets us into a little secret: “lack of preparedness among banks".
There are multiple issues with IndAS. First, it requires banks to provide for “expected" bad loans, thereby increasing provisioning and capital requirements. There are also issues about valuation of assets and liabilities, as well as income recognition. For example, banks usually credit loan-processing charges upfront to profit and loss account. Under the new rules, they will have to amortize that income over the life of the loan. At its heart, IndAS is more than just a change in the accounting rules; it overhauls how financial institutions value assets or liabilities and report their performance. It is quite understandable if the RBI does not immediately want a reporting regime for banks that depresses incomes, increases provisioning and significantly has an impact on net worth, especially during the government’s ambitious disinvestment programme.
The adoption of counter-cyclical capital buffers (CCCB) has also been pushed to a later date; all that the RBI was prepared to say is that “it is not necessary to activate CCCB at this point in time". There are no further explanations. RBI’s February 2015 guidelines identified credit-to-GDP gap–explained as difference between credit-to-GDP ratio and the long-term trend value of the same ratio—as the main indicator (in conjunction with some secondary parameters) for activating the CCCB framework. The February 2015 guideline also says that the buffer is to be activated when the gap touches 3 percentage points. According to latest data available with Bank for International Settlement (till end of September 2017), the gap was negative 7.8%. Therefore, the RBI is justified in deferring the buffer’s implementation.
But the beef is elsewhere: the monetary policy committee’s statement and the accompanying monetary policy report seem quite bullish on credit growth. Rules require that the buffer start be announced four quarters in advance. Given that the long-run credit-GDP trend was 64.6 at the end of September 2017, does the RBI have reservations that credit-to-GDP ratio will continue to remain below this level for the next four quarters? A bit of detailed communications or transparency would have helped.
Speaking of which, the RBI has over the past couple of years publicly announced deadlines for adoption of various prudential norms. But, perhaps concerned over their possible impact on fragile bank bottom-lines, the RBI is believed to have postponed many of them through private messages to banks. Most central banks across the globe embraced greater transparency in the aftermath of the 2008 financial crisis; the RBI seems to be swimming against that tide.
Rajrishi Singhal is a consultant and former editor of a leading business newspaper. His Twitter handle is @rajrishisinghal.
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