Liq­uid­ity Steps Should Ma­te­ri­ally Help in Trans­mis­sion of Rate Cuts

The Economic Times - - Rbi Monetary Policy -

The yet an­other 25 ba­sis points cut in repo rate by the RBI and an ac­com­moda­tive pol­icy com­men­tary were in line with ex­pec­ta­tions. But, the high­light — and a pleas­ant sur­prise — of Gover nor Raghu­ram­Ra­jan’spol­i­cy­is­the­sup­porthe ex­tends to bank­ing sys­tem liq­uid­ity.

The pol­icy could be seen as an in­flec­tion point in RBI’s stance on liq­uid­ity — the cen­tral bank now de­cides to pro­gres­sively lower the av­er­age ex ante sys­temic liq­uid­ity deficit from the cur­rent 1% of NDTL to a po­si­tion closer to neu­tral­ity. A back-of-the-en­ve­lope cal­cu­la­tion sug­gests this might lead to liq­uid­ity in­fu­sion of about ₹ 1 tril­lion by the RBI in the com­ing months. We wel­come this change in RBI’s stance and be­lieve it should ma­te­ri­ally help in trans­mis­sion of rate cuts, apart from sup­port­ing mul­ti­ple as­set classes in In­dia. In ef­fect, the im­pact of the RBI pol­icy should be seen as far stronger than just an­other 25 bps repo rate cut.

The RBI has now cu­mu­la­tively cut repo rate by 150 bps in 15 months. We ex­pect an­other 25 bps repo rate (or mod­estly larger) cut in 2016. Nev­er­the­less, cur­rently, the cen­tral bank has rel­a­tively few ‘rate cut bul­lets’ left in the near term. At this junc­ture, thus, the RBI’s change in pol­icy frame­work and fo­cus on liq­uid­ity in­fu­sion, likely pri­mar­ily through OMOs, is a sig­nif­i­cant move. The RBI has been markedly cau­tious as re­gards in­jec­tion of liq­uid­ity in the re­cent past. For in­stance, re­serve money growth — which re­flects the cen­tral bank’s in­jec­tion of pri­mary liq­uid­ity — av­er­aged merely about 7.5% year-on-year dur­ing the four-year pe­riod of 2012-2015, way too low com­pared with its longer-term av­er­age of around 13%. His­tor­i­cally, the quan­tum chan­nel played a ma­jor role in In­dia and liq­uid­ity in­fu­sion by the RBI in com­ing months should also be a strong cat­a­lyst in trans­mis­sion of its on­go­ing mone­tary eas­ing.

As re­gards fu­ture guid­ance, the RBI com­men­tary con­tin­ues to un­der­score the data-de­pen­dent na­ture of mone­tary pol­icy ac­tion while main­tain­ing an ac­com­moda­tive bias. While the global back­drop re­mains chal­leng­ing, In­dia’s do­mes­tic macro-fun­da­men­tals re­main con­ducive for an ac­com­moda­tive mone­tary pol­icy stance. In­fla­tion stays be­nign — CPI will likely un­der­shoot the cen­tral bank’s ‘tar­get’ of 5% in 2016. WPI in­fla­tion has al­ready recorded year-on-year con­trac­tions for 16 con­sec­u­tive months, a pat­tern not wit­nessed in over four decades. De­mand-driven pres­sure on in­fla­tion re­mains largely ab­sent. Al­though the ru­pee is likely to weaken against the US dol­lar in 2016, it is not ex­pected to ma­te­ri­ally al­ter the oth­er­wise sub­dued in­fla­tion tra­jec­tory. Re­cov­ery in eco­nomic ac­tiv­i­ties re­mains mod­est, with a markedly sub­dued pri­vate capex cy­cle. Thus, the seem­ingly high head­line GDP growth should also not be seen as any ob­sta­cle for mone­tary eas­ing given the up­side bias in the ‘new’ GDP se­ries.

Newspapers in English

Newspapers from India

© PressReader. All rights reserved.