RBI governor Shaktikanta Das hints at another rate cut with fiscal restraint praise for government

Ahead of the monetary policy review on 7 August, Reserve Bank of India (RBI) governor Shaktikanta Das on Monday praised the government’s commitment to fiscal consolidation in the Budget, raising hopes for a fourth consecutive policy rate cut next month.

After the customary post-budget meeting between officials of the finance ministry and RBI, Das said the central bank would “always be happy” when the fiscal deficit is maintained. “And in this case, the fiscal deficit has been improved from 3.4% to 3.3% (of gross domestic product in 2019-20). RBI will be happy mainly because it limits the so-called crowding out effect. So, that is something very positive because it gives more space for private sector borrowing,” Das told reporters.

In her maiden budget, finance minister Nirmala Sitharaman stuck to the path of fiscal consolidation, promising to reduce fiscal deficit to 3.34% of GDP in FY20 from 3.37% of GDP in FY19.

Das said the government is maintaining a fiscal glide path for the last five years, by bringing down fiscal deficit from 4.1% of GDP in FY15 to 3.3% in FY20. “So there is a glide path which is being maintained. Overall, it should be good for the macro-economic situation,” he added.

In June, RBI’s monetary policy committee changed its policy stance from “neutral” to “accommodative” and effected a third consecutive policy rate cut to support economic growth as inflation remained benign.

Tanvee Gupta Jain, an economist at UBS, said she believes the lack of fiscal impetus in this budget opens the door to further RBI easing, even beyond the further 25 basis point cut she expects. “We expect a continued policy push in the form of open market operations and surplus capital transfer by the RBI to ensure banking system liquidity and credit growth support to speed up the monetary transmission,” she added.

On the overseas sovereign bond proposed in the budget, Das said as the government’s debt manager, he is sure the government will discuss the matter with RBI. “Whatever we need to discuss with the government will be discussed internally. I need not say those points to you,” he added.

On the impact of higher excise duty and road cess on petroleum products on inflation, Das said it takes time for transmission of such hikes. “It is not like as if the next day it will get reflected in the inflation. Our internal team will assess the measure. It is a marginal increase also.”

Asked about the poor monetary transmission so far post rate cuts by RBI, Das said the time period for transmission has compressed recently. “One positive thing that is happening now is that earlier it used to take six months for transmission to happen, now the transmission is taking place in a much shorter period of about 2/3 months.”

In the last monetary policy review in June, Das said out of total 50bps rate cut by the central bank, 21bps has been passed on to the consumers.

He said the surplus liquidity in the system currently will help in better transmission. “I would say, in coming weeks and months, we would see better transmission taking place. This is a matter that we constantly review in RBI and do whatever is required to be done,” he said.

On government incentives to banks to fund non-banking financial companies (NBFCs), Das said it is for the banks to implement the same. “RBI will back up the banks if individual banks require additional liquidity,” he said.

Sitharaman announced in the budget that the government will provide a one-time six months partial credit guarantee to state-run banks for the acquisition of up to ₹1 trillion of highly-rated assets from NBFCs.

Das also praised the proposal to infuse ₹70,000 crore of capital into state-run banks in the budget. “It is a very positive development because it will not only enable banks to maintain the capital they need to comply with regulatory requirements, but also give enough capital to banks to step up their lending and the credit disbursement,” he said.