It’s The Best That Gover­nor Ra­jan Could Have Done

The Economic Times - - Money - SU­GATA GHOSH

Raghu­ram Ra­jan has turned mone­tary pol­icy into a T20 cricket match with all its glo­ri­ous un­cer­tain­ties and stun­ning sur­prises. The as­ton­ish­ing part in Tues­day’s pol­icy is not the cut in the bench­mark in­ter­est rate, which was a fore­gone con­clu­sion — but the shift in stance by the Re­serve Bank of In­dia.

There is ab­so­lutely no rea­son for New Delhi, banks, traders as well as the army of cheer­lead­ers to be put off by just a quar­ter point rate cut. There’s a far more sig­nif­i­cant change that the cen­tral bank gover­nor has brought in; while he could have done it some months ago, but Ra­jan, as al­ways, chooses his tim­ing.

His mes­sage to banks, his prime con­stituency, couldn’t have been clearer: lower in­ter­est rates, and I will do all that’s pos­si­ble to cre­ate more liq­uid­ity in the sys­tem and bring down the over­all cost of fund. With de­posit growth at a 50year low, Ra­jan soft­ened the penalty on banks for ex­tra bor­row­ing from RBI; it will go down as a hint that banks can over­stretch a lit­tle (by bor­row­ing short term funds) to step up lend­ing.

For the first time since he took charge in Septem­ber 2013, the RBI gover­nor has recog­nised the ur­gency for eas­ier liq­uid­ity — with­out which any rate re­duc­tion by RBI is not trans­mit­ted to the end bor­rower through the bank­ing sys­tem. Also, ap­par­ent in the pol­icy text is the mes­sage that Tues­day’s rate cut will not be the last be­fore his three-year term ends in Septem­ber.

The moves to cre­ate ad­di­tional liq­uid­ity and give some breath­ing space to banks and bond houses are di­rect: Repo rate, the rate at which banks bor­row short-term money from RBI, has been low­ered by 25 ba­sis points to 6.5%; daily bal­ance on Cash Re­serve Ra­tio — the slice of cus­tomer de­posits that banks have to manda­to­rily park with RBI — is re­duced to 90% from 95%; and the ex­tra in­ter­est rate that banks are charged for bor­row­ing over and above their quota un­der repo is down to 7% from 7.75%. At a time banks are hob­bled by sticky as­sets and low de­posit growth, the mea­sures will give lenders the much-needed flex­i­bil­ity.

The as­sur­ance that RBI will sus­tain its pace of open mar­ket op­er­a­tions — pur­chase of se­cu­ri­ties from the mar­kets to in­fuse money — will calm the nerves of bank trea­sur­ers, bond traders, and badly bruised in­vestors of bank stocks. Ac­tive open mar­ket op­er­a­tions, which has picked up this year, will sup­port bond prices and cush­ion bat­tered bal­ancesheets of banks from mark-tomar­ket losses.

The first bi-monthly pol­icy state­ment on Tues­day is the best that Ra­jan could have done. Low in­fla­tion, cut in small sav­ings rates, in­de­pen­dence in the con­duct­ing mone­tary pol­icy, and New Delhi’s prom­ise to keep fis­cal deficit un­der check — all com­bined to cre­ate the mo­ment for Ra­jan to de­liver.

But, the larger ques­tion is, will Ra­jan shelve the re­port of his deputy Ur­jit Pa­tel by slowly bring­ing in a new mone­tary pol­icy game to­wards the close of his (pos­si­bly, first) in­nings? Over the past few years, Mint Street has re­peat­edly un­der­scored that mone­tary pol­icy works best when there is liq­uid­ity deficit in the sys­tem. This has been the premise of RBI’s pol­icy ac­tions so far. Is this about the change? The pol­icy text and Ra­jan’s con­ver­sa­tions with re­ports lend them­selves to in­ter­pre­ta­tion. When a jour­nal­ist asked him whether RBI would im­ple­ment the sub­se­quent rec­om­men­da­tions of Ur­jit Pa­tel’s re­port (as many ex­pected he could), the gover­nor said he “doesn’t re­mem­ber” the sec­ond part.

An­a­lysts and me­dia will con­tinue to in­ter­pret such state­ments as they typ­i­cally do. But there is no am­bi­gu­ity in the main take­away from the pol­icy: amid un­cer­tain growth, global im­pon­der­ables, and con­tin­u­ous dip in ex­ports, Ra­jan has acted be­fore it is too late.

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