Is RBI damaging own image?
mumbai — India’s surprise move to abolish high-value rupee notes has undermined the central bank’s reputation for competence and independence, even as it remains a credible institution, Standard & Poor’s director Kyran Curry said on Wednesday.
The comments come as the Reserve Bank of India and the government face criticism for their implementation of the demonetisation initative in November, abolishing ₹500 and ₹1,000 notes ($7.41-$14.82), which accounted for 86 per cent of the currency in circulation.
The slow replacement of the abolished bills has sparked a shortage of cash that has hit large parts of the economy, and the RBI and government have had to subsequently announce a series of ad hoc measures to ease the impact of the measure.
At the same time some policy makers, including former Prime Minister Manmohan Singh, now part of the opposition, has also questioned the RBI’s independence for agreeing to implement the action without much preparation.
Curry, in a teleconference with media, said demonetisation had undermined confidence in the predictability and effectiveness of policymaking in India, including of the RBI.
“Demonetisation has cast a shadow over the RBI’s competence and independence,” Curry said.
However, he also noted that “we still think this institution is a very credible one, and in terms of the conduct of monetary policy, it’s a very mature institution.”
The RBI under Governor Urjit Patel has also been criticised recently after surprising investors by keeping interest rates on hold last week, the second time in a row it has wrong-footed investors with its monetary policy decision.
India’s wholesale inflation eased less than estimated, complicating the outlook for policy
Demonetisation has cast a shadow over the RBI’s competence and independence
Kyran Curry, Director of S&P
makers after the benchmark gauge slumped.
Wholesale prices rose 3.15 per cent in November from a year earlier, the Commerce Ministry said in a statement on Wednesday. That’s slower than the previous month’s 3.4 per cent, but faster than the 3.1 percent decline predicted by the median of 29 estimates in a Bloomberg survey of economists. Data on Tuesday showed benchmark consumer-price inflation slumped to a two-year low of 3.63 per cent, compared with 3.9 per cent estimated in a survey. Meanwhile, industry-wide demand for passenger vehicles in India will be depressed for a few months after Modi’s unprecedented cash clampdown, according to senior executives at Tata Motors and Honda Motor.
The cash crunch, following the withdrawal of high-denomination banknotes, has hurt consumer sentiment and is expected to continue through March, Mayank Pareek, president of passenger vehicle business at Tata Motors, said in an interview. Customers who have deferred purchases may come back in a few months depending on the economy, Jnaneswar Sen, senior vice-president at Honda’s India auto unit, said without elaborating.
Passenger-vehicle sales expanded at the slowest pace in nine months in November just as automakers were expecting a good monsoon after back-to-back droughts to boost rural incomes and spur demand. Sales of motorcycles and scooters, where about 65 per cent of purchases are paid for in cash, fell for the first time in 11 months.
“Vehicle purchase is more of a discretionary spend and not a necessary spend therefore customers will postpone their buying decision,” said Abdul Majeed, partner at Price Waterhouse. “Automakers will cut production, focus more on exports and give discounts to clear inventory at dealers till such time normalcy returns.”
Honda’s auto sales in India fell 45 per cent in November, the steepest decline since December 2013. At Tata Motors, sales slowed from October even as new models like the Tiago hatchback helped the carmaker post a 14 per cent jump in deliveries. Industry-wide deliveries rose 1.8 per cent to 240,979 units. — Reuters/Bloomberg