4 Mem­bers Favoured Neu­tral Liq­uid­ity Stand

Stance changed to as­sess how ef­fect of de­mon­eti­sa­tion on in­fla­tion, out­put played out

The Economic Times - - Finance & Commodities - Our Bureau

Mum­bai: The three rep­re­sen­ta­tives from the Re­serve Bank of In­dia (RBI) in the Mon­e­tary Pol­icy Com­mit­tee (MPC), and an ex­ter­nal mem­ber had favoured a change in the liq­uid­ity stance from ac­com­moda­tive to neu­tral in the re­cent pol­icy state­ment brought out on Fe­bru­ary 8. This move had taken the fi­nan­cial mar­kets by sur­prise.

While all RBI rep­re­sen­ta­tives ex­plic­itly favoured a neu­tral liq­uid­ity stance, only one of the ex­ter­nal mem­bers, Ravin­dra Dho­lakia, jus­ti­fied the neu­tral liq­uid­ity stance. He felt that the cur­rent (pol­icy rate) is op­ti­mal for liq­uid­ity in the econ­omy. There­fore, a change of stance from ac­com­moda­tive to neu­tral at this stage was de­sir­able.

“It can im­part the nec­es­sary flex­i­bil­ity for the mon­e­tary pol­icy in fu­ture to re­spond to any devel­op­ment on ei­ther side,” Dho­lakia said. The two ex­ter­nal mem­bers –– Chetan Ghate and Pami Dua –– did not make any ref­er­ence to liq­uid­ity in their state­ments.

How­ever, the de­ci­sion of the MPC, which com­prises three RBI repre- sen­ta­tives and three ex­ter­nal mem­bers, to keep in­ter­est rates un­changed was uni­lat­eral, ac­cord­ing totheMPCmin­utes­re­leased­byRBI on Wed­nes­day.

The RBI had kept its key pol­icy rate –– the repo rate –– un­changed at 6.25% in its Fe­bru­ary 8 pol­icy state­ments. The com­mit­tee de­cided to change the stance from ac­com­moda­tive to neu­tral while keep­ing the pol­icy rate on hold to as­sess how the ef­fects of de­mon­eti­sa­tion on in­fla­tion and out­put played out.

RBI has con­ducted mar­ket liq­uid­ity op­er­a­tions ac­cord­ing to a frame­work it had put in place in April 2016. It has been pro­gres­sively mov­ing the sys­tem level con­di­tions to close to neu­tral­ity –– a level of liq­uid­ity ad­e­quate enough to meet de­mand. This stance is ex­pected to con­tinue. RBI ex­pects sur­plus liq­uid­ity to de­cline with pro­gres­sive re­mon­eti­sa­tion and the cur­rent abun­dant liq­uid­ity with banks is likely to persist till early 2017-18.

All the six mem­bers ex­pressed con­cern­son­in­fla­tion.Fourof them –– two ex­ter­nal mem­bers (Pami Dua and Chetan Ghate) and two RBI rep­re­sen­ta­tives (Vi­ral Acharya and Ur­jit Patel) ex­pressed con­cerns that in­fla­tion was ‘sticky’ in cer­tain seg­ments.

The MPC is com­mit­ted to bring­ing head­line in­fla­tion closer to 4% on a durable ba­sis and in a cal­i­brated man­ner.

Ravin­dra Dho­lakia ex­pressed con­cerns that state gov­ern­ment bud­gets have been a cause of con­cern be­cause the move­ment in their fis­cal deficits largely de­ter­mines the vari­a­tion in the com­bined fis­cal deficit of the coun­try.

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