Opinion
RBI's focus on inflation control will help boost GDP expansion
Summary
- For price stability to serve as a firm base for sustainable 7.2% plus growth, RBI must meet its 4% inflation target. Deft liquidity modulation is crucial and credit quality mustn’t drop.
The Reserve Bank of India (RBI) has revised its projection of our GDP growth this fiscal year from 6.5% to 7%. Since 7.2% is the annual rate at which an economy must grow on average in real terms to double in size every decade, 7.2% has been a marker of sorts for India’s emergence. It was achieved last year, by government estimates, and has even been exceeded several times in the past. Today’s challenge, though, is to expand at that clip on a firm base of price stability, defined since 2016 as retail inflation held steady at 4% year-on-year. This will support faster growth by reducing a key risk borne by lenders and making loans cheaper overall. It also explains why RBI kept its policy rate unchanged at 6.5% in its rate-setting panel’s policy review of 8 December, retained “withdrawal of accommodation" as its stance, and has an “Arjuna’s quiver" handy for inflation control. Last year, the central bank used rate hikes of 2.5 percentage points to tighten credit. While RBI places inflation at 5.4% for 2023-24, which is below its alarm level of 6%, hitting the actual target looks set to stretch its fight to next fiscal year. Should it pan out as planned—shocks must not intervene—and the aim is struck sustainably, our economy could move into a better gear. As a credible cap on inflation can soften the cost of capital without Indian savers at large being repressed, it would also be equitable. And since this outcome’s pay-off is so high, RBI’s focus must not waver.
Thankfully, RBI’s gradual reversal of the monetary support extended to help tide over the covid crunch has been quite orderly. As the Governor’s statement noted, its balance sheet had swollen to 28.6% of GDP in 2020-21, but was 23.3% of GDP in 2022-23 and 21.6% this year (up to 1 December). Although liquidity was choppy for the most part, RBI has actively sought to manage it. While money mop-ups have been routine over the last year-and-a-half, recent months have seen a squeeze. As bank regulator, RBI had in August sharply raised the cash that must be kept in reserve by lenders. In September, its liquidity adjustment facility (LAF) for banks to access and deposit funds overnight went into “deficit mode" (on a net basis) for the first time since May 2019. RBI’s variable-rate bond auctions have had fewer takers, reportedly, while its deposit window for banks to park their surpluses (at 6.25%) had significant inflows, even as borrowings (at 6.75%) by lenders short of money were large. To assist banks faced with cash challenges, RBI will allow “reversal of liquidity facilities" under LAF even on weekends and holidays from 30 December. The bank regulator is no slouch on its vigil of the sector either. In November, RBI increased the risk weight for exposure to unsecured consumer credit, thereby using capital buffers to slow down collateral-free lending with no identifiable end-use. Even though an online credit spurt seems to pose no systemic threat, given its tiny share of lending, RBI indicated a preference for preventive fire-proofing. Hence its “fintech repository" of data that could potentially serve as a fire alarm and its move to cover loan-aggregator apps under its evolving oversight of digital lending.
Over-regulation has been a charge levelled at RBI many times down the decades, but even though innovation can suffer as a result, let’s not forget how it favours banking stability, its relative forte. If price stability is achieved too, it would earn RBI a standing ovation.
