We’ve started see­ing the up­turn in eco­nomic growth

Mint Asia ST - - News - B Y TA MAL B ANDYOPADHYAY

In his first in­ter­view to any news­pa­per since he took over as Re­serve Bank of In­dia (RBI) gover­nor in Septem­ber 2016, Ur­jit Pa­tel dis­cussed growth, in­fla­tion, liq­uid­ity and the one-year jour­ney of the mone­tary pol­icy com­mit­tee (MPC).

The Oc­to­ber mone­tary pol­icy marked the first an­niver­sary of the MPC, the new ar­chi­tec­ture in this space that was put in place af­ter the In­dian cen­tral bank got the man­date for flex­i­ble in­fla­tion tar­get­ing. The MPC has six mem­bers—three each from RBI and the aca­demic world—who de­cide the di­rec­tion of the coun­try’s mone­tary pol­icy, and is a move away from the pre­vi­ous ar­chi­tec­ture that made the RBI gover­nor the ul­ti­mate author­ity on this. Edited ex­cerpts: Gover­nor, the MPC has been con­sti­tuted on the ba­sis of the re­port of the Ex­pert Com­mit­tee to Re­vise and Strengthen the Mone­tary Pol­icy Frame­work un­der your chair­man­ship. The panel out­lined the glide path for in­fla­tion—from 10% to 8% and 6%, in phases—and fi­nally sug­gested a 4% tar­get with a +/- band of 2%. But now it seems that you have a sin­gle point tar­get—4%. Yes, 4% is the govern­ment man­dated tar­get to the MPC. The plus/mi­nus 2 per­cent­age­point up­per and lower bands are the tol­er­ance lev­els spec­i­fied by the govern­ment. If we breach those for three con­sec­u­tive quar­ters, we need to in­form the govern­ment of why that hap­pened, and what we pro­pose to do to bring in­fla­tion within the two bands.

This is the man­dated tar­get for five years. We have com­pleted one year. So, the ob­jec­tive re­mains to have a 4% in­fla­tion tar­get on a durable ba­sis; but be­cause of the band, we have a flex­i­ble in­fla­tion tar­get­ing mech­a­nism. Since it is the pol­icy of MPC, why are you still stick­ing to the ritual of meet­ing the fi­nance min- istry be­fore an­nounc­ing any pol­icy? It is not a ritual. It gives both the fi­nance min­is­ter and the gover­nor an op­por­tu­nity to dis­cuss and ex­change views on the whole macroe­co­nomic sce­nario, as also the wider fi­nan­cial sec­tor. Af­ter all, both growth and in­fla­tion are an out­come of the over­all na­tional pol­icy mix. In most coun­tries, this kind of in­ter­ac­tion would be tak­ing place reg­u­larly. Your re­port said that while the MPC will have an in­fla­tion tar­get, it must also take into con­sid­er­a­tion the out­put gap—that is, the ac­tual out­put growth rel­a­tive to the trend and po­ten­tial. Clearly, you can­not throw growth out of the win­dow. Is there any level fixed for the out­put gap? The two im­por­tant vari­ables for the pol­icy for­mu­la­tion are pro­jected in­fla­tion and the out­put gap. There is no clear hide­bound math­e­mat­ics that we must give ‘X’ weight to in­fla­tion and ‘Y’ weight to growth and form the as­so­ci­ated pol­icy. But what is clearly laid down is the 4% in­fla­tion tar­get; and we will strive to achieve that, keep­ing in mind the ob­jec­tive of growth.

Growth is al­ways there in the MPC’S scheme of things; we don’t lose sight of that, but not at the cost of in­fla­tion. How­ever, we have to be care­ful—we should aim at achiev- ing the in­fla­tion tar­get with­out los­ing sight of sup­port­ing eco­nomic growth. But we get con­fused be­cause of mul­ti­ple views on the out­put gap (dif­fer­ence between the out­put of an econ­omy and the max­i­mum po­ten­tial out­put of the econ­omy, ex­pressed as a per­cent­age of GDP, or gross do­mes­tic prod­uct). There is a wide vari­ance between what RBI feels and what out­side ex­perts say. That is nat­u­ral. There will al­ways be di­ver­gence of views on the out­put gap as it is un­ob­serv­able in a rig­or­ous di­rect sense. There are only es­ti­mates. How can there be a strong con­sen­sus on that? How do we ac­tu­ally and di­rectly mea­sure the po­ten­tial of the econ­omy and say this much is the gap at this point in time? This is why we lis­ten to dif­fer­ent views of rea­son­able peo­ple. And we make th­ese views pub­lic. This is why we place the min­utes of the MPC meet­ings on our web­site.

This time, the MPC ac­knowl­edged the like­li­hood of the out­put gap widen­ing but felt the need for more data to as­cer­tain bet­ter the tran­sient ver­sus sus­tained head­winds in the re­cent growth prints. And that is why the rate was un­changed. The MPC also made sug­ges­tions for the faster clo­sure of the out­put gap. An emerg­ing mar­ket econ­omy is prone to many shocks. And then you have struc­tural dis­rup­tions such as de­mon­e­ti­za­tion and goods and ser­vices tax (GST). Can the MPC be rigid about its in­fla­tion tar­get?

Cer­tainly not. Look at the fan charts of in­fla­tion that the mone­tary pol­icy res­o­lu­tion con­tains. They cap­ture the un­cer­tain­ties. We need to take a bal­anced view. Yes, there is a drop in the GDP growth in the June quar­ter (to 5.7%), but we need to take into ac­count the tran­si­tory ef­fects re­lat­ing to GST.

We have re­duced our full-year growth fore­cast from 7.3% to 6.7%, but we feel, and our pro­jec­tions based on high fre­quency real econ­omy in­di­ca­tors sug­gest, that growth will pick up in the third and fourth quar­ters (of the cur­rent fis­cal year) to above 7%. Our ful­lyear es­ti­mates are in line with OECD’S (Or­gan­i­sa­tion for Eco­nomic Co­op­er­a­tion and De­vel­op­ment’s) most re­cent es­ti­mate of In­dia’s growth, but lower than that of the Asian De­vel­op­ment Bank (7%).

We have started see­ing the up­turn. The Nikkei In­dia Ser­vices PMI Busi­ness Ac­tiv­ity In­dex rose more than 3 per­cent­age points in Septem­ber over Au­gust; the core sec­tor IIP (In­dex of In­dus­trial Pro­duc­tion) saw a 4.9% rise in Au­gust. If you look at some of the high­fre­quency data such as au­to­mo­bile and twowheeler sales, you also see the up­turn there. An­other im­por­tant as­pect of the new mone­tary pol­icy frame­work is liq­uid­ity man­age­ment. The liq­uid­ity in the sys­tem should be in sync with the in­ter­est rate pol­icy and the mone­tary stance. You have a neu­tral stance, but the sys­tem has ex­cess liq­uid­ity. There has been ex­cess liq­uid­ity for a va­ri­ety of well-known rea­sons, but the liq­uid­ity over­hang is ta­per­ing off. Our ob­jec­tive is to keep the weighted av­er­age call money rate as close to the repo rate as pos­si­ble.

With the de­cline in liq­uid­ity in the sys­tem, the weighted av­er­age call rate which, on an av­er­age, traded be­low the repo rate by 18 ba­sis points dur­ing July has, sub­se­quently, risen by 5 ba­sis points in Septem­ber. (One ba­sis point is one-hun­dredth of a per­cent­age point.) Even dur­ing the most chal­leng­ing times re­gard­ing liq­uid­ity over the past 12 months, the broad in­tegrity of the mone­tary stance was main­tained by RBI. Your re­port rec­om­mended a spe­cial de­posit fa­cil­ity to soak up ex­cess liq­uid­ity. What hap­pened to that? The spe­cial de­posit fa­cil­ity is a long-stand­ing re­quest of RBI. The RBI Act needs to be amended to fa­cil­i­tate that. This will give us one more tool and im­part flex­i­bil­ity in our liq­uid­ity man­age­ment. Squeez­ing out liq­uid­ity has a cost, and this in­stru­ment will help us op­ti­mize over that fis­cal cost, and we would per­haps not have to re­sort to a ‘vi­o­lent’ mea­sure like a very large in­crease in the CRR which we had to un­der­take in 2016. (CRR, or cash re­serve ra­tio, refers to the por­tion of de­posits that com­mer­cial banks are re­quired to keep with RBI on which they do not earn any in­ter­est.) In due course, would you like bankers or trea­sury man­agers at the MPC? Many of the US Fed bosses are from the mar­ket. We have an ex­cel­lent MPC. Out of six mem­bers, we have three ex­ter­nal mem­bers. They are re­spected as re­searchers. They have no­table aca­demic back­grounds; teach at top in­sti­tu­tions in our coun­try; and have thought about In­dian macro­eco­nomics for most of their pro­fes­sional lives.

The FOMC (Fed­eral Open Mar­ket Com­mit­tee, the pol­i­cy­mak­ing body of the US Fed­eral Re­serve) does not have out­siders. Yes, they have peo­ple from the mar­kets but they are from the Fed sys­tem it­self. We have the req­ui­site ex­per­tise within RBI.

You must ap­pre­ci­ate that the cur­rent govern­ment, the strong­est one in about three decades by virtue of a clear ma­jor­ity in Par­lia­ment, has ac­tu­ally ceded pow­ers by con­sti­tut­ing an MPC with ex­ter­nal mem­bers, and the GST Coun­cil, where the cen­tre is not in the ma­jor­ity. Th­ese are two im­por­tant new in­sti­tu­tions—one in the mone­tary pol­icy space and the other in the fis­cal space. Can we ask for more?

Tamal Bandy­opad­hyay, con­sult­ing edi­tor at Mint, is ad­viser to Band­han Bank. He is also the au­thor of A Bank for the Buck, Sa­hara: The Un­told Story, and Band­han: The Mak­ing of a Bank. His Twit­ter han­dle is @tamal­bandyo.

ABHIJIT BHATLEKAR/MINT

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