R Gandhi, Former Deputy Governor, RBI, says Reserve Bank has proactively implemented monetary policies to boost growth, given controlled inflation. The Governor suggests fiscal policy will now play a crucial role. The Monetary Policy Committee has adopted a neutral stance, signaling limited further monetary action. This prepares them to react if inflation rises again. Future economic support depends on fiscal measures.
The change of stance has left everybody surprised, going from accommodative to neutral. What do you think is the reason for that and what will it deliver as far as RBI's projections are concerned?
R Gandhi: That is quite a surprise to the market, of course, but the Governor has given the rationale why MPC has decided to do so. The first point that we have to appreciate is that the Reserve Bank has frontloaded quite a large cut in repo rate and also larger cut in the CRR. The Governor mentioned that he is up frontloading, whatever possible monetary policy and liquidity action that Reserve Bank can take and he also cautioned that this is the thing that we can do; hereafter heavy weight will have to be borne by implication by fiscal policy.
He is saying whatever monetary policy could do we have done well in advance anticipating that we have to support the growth since that inflation is quite under control, so we have done quite a lot on what is possible by the Reserve Bank. Thereafter, it has to be by the economy and more specifically the fiscal also. MPC has shifted the stance to neutral because there’s nothing more we can do. That is the implication there. Depending upon the circumstances, if RBI had to take opposite action in terms of increasing the rate or anything if inflation is rearing its head again, then to be in readiness, they have gone to neutral stance. That is my reading.
I want to understand from you this dynamic. In one policy, the stance was shifted, another policy has gone back to the previous stance. Do you think it will give more flexibility to the Reserve Bank of India in future rate of action with the kind of trade tensions and the evolving situations which are there?
R Gandhi: That is correct, that is the intention because right now having done or having exhausted all possible measures, RBI can take in terms of rate cut and also CRR cut, hereafter they have to play safe. They have to clearly look at the evolving situation in terms of trajectory. Even though the forecast about inflation is quite benign, obviously central banks would always like to be cautious, that is why they have shifted their stance to neutral. That does not mean that they will hike the rate or anything, no. As you mentioned, they are keeping themselves in readiness to move either way.
I want to come to you for the question on the growth front. While there has been no revision on the growth guidance, the governor has mentioned that they have done enough in this policy, as far as the rate cut is concerned, 50 basis point has been announced. I want to understand if the Reserve Bank of India has limited options to push growth?
R Gandhi: Yes, that is the first implication we have to read that whatever possible in terms of cutting the rates and increasing the liquidity, the bank has taken action because any more cuts can disturb the household savings. Because household savings, now the interest rate will be still further down because totally in this last three policy announcement itself together it is 100 basis point cut. It can affect negatively the household savings and that is why they are cautioning that by any more cuts if it is done, then it is going to be difficult for savings to be encouraged, so that is one thing Reserve Bank obviously has kept in mind to indicate that do not expect some more cuts automatically, that all depends upon evolving situation, that is number one.
Number two is that in the fourth quarter, the inflation forecast is 4.4% and if the growth gains momentum, then it can lead to further increase in inflation. At that time, obviously the Reserve Bank will have to be ready to take action on the other side. That explains the neutral stance. In any case, growth has not always been the primary weapon; it cannot be monetary policy.
For growth, it has to be beyond monetary policy. That is why indirectly indicating that whatever we can do from a monetary policy angle or liquidity angle, we have already done it. Hereafter, it has to be by other forces. So, both private investment will have to get higher confidence and encouragement because of these rate cuts there, so that will increase the growth momentum and fiscal policy. Also, if further impetus is coming or public investment continues to be robust, then the growth trajectory could be more, so that is second.
Another caution which he has mentioned is relating to the international situation, even though today oil prices are very benign that is on the positive side, but the geopolitical situation can disturb the situation and the tariff related impact. These things have definitely been kept in mind and that is why you are right in the sense that for supporting growth now, the forces which will have to be encouraged are beyond the Reserve Bank.
The change of stance has left everybody surprised, going from accommodative to neutral. What do you think is the reason for that and what will it deliver as far as RBI's projections are concerned?
R Gandhi: That is quite a surprise to the market, of course, but the Governor has given the rationale why MPC has decided to do so. The first point that we have to appreciate is that the Reserve Bank has frontloaded quite a large cut in repo rate and also larger cut in the CRR. The Governor mentioned that he is up frontloading, whatever possible monetary policy and liquidity action that Reserve Bank can take and he also cautioned that this is the thing that we can do; hereafter heavy weight will have to be borne by implication by fiscal policy.
He is saying whatever monetary policy could do we have done well in advance anticipating that we have to support the growth since that inflation is quite under control, so we have done quite a lot on what is possible by the Reserve Bank. Thereafter, it has to be by the economy and more specifically the fiscal also. MPC has shifted the stance to neutral because there’s nothing more we can do. That is the implication there. Depending upon the circumstances, if RBI had to take opposite action in terms of increasing the rate or anything if inflation is rearing its head again, then to be in readiness, they have gone to neutral stance. That is my reading.
I want to understand from you this dynamic. In one policy, the stance was shifted, another policy has gone back to the previous stance. Do you think it will give more flexibility to the Reserve Bank of India in future rate of action with the kind of trade tensions and the evolving situations which are there?
R Gandhi: That is correct, that is the intention because right now having done or having exhausted all possible measures, RBI can take in terms of rate cut and also CRR cut, hereafter they have to play safe. They have to clearly look at the evolving situation in terms of trajectory. Even though the forecast about inflation is quite benign, obviously central banks would always like to be cautious, that is why they have shifted their stance to neutral. That does not mean that they will hike the rate or anything, no. As you mentioned, they are keeping themselves in readiness to move either way.
I want to come to you for the question on the growth front. While there has been no revision on the growth guidance, the governor has mentioned that they have done enough in this policy, as far as the rate cut is concerned, 50 basis point has been announced. I want to understand if the Reserve Bank of India has limited options to push growth?
R Gandhi: Yes, that is the first implication we have to read that whatever possible in terms of cutting the rates and increasing the liquidity, the bank has taken action because any more cuts can disturb the household savings. Because household savings, now the interest rate will be still further down because totally in this last three policy announcement itself together it is 100 basis point cut. It can affect negatively the household savings and that is why they are cautioning that by any more cuts if it is done, then it is going to be difficult for savings to be encouraged, so that is one thing Reserve Bank obviously has kept in mind to indicate that do not expect some more cuts automatically, that all depends upon evolving situation, that is number one.
Number two is that in the fourth quarter, the inflation forecast is 4.4% and if the growth gains momentum, then it can lead to further increase in inflation. At that time, obviously the Reserve Bank will have to be ready to take action on the other side. That explains the neutral stance. In any case, growth has not always been the primary weapon; it cannot be monetary policy.
For growth, it has to be beyond monetary policy. That is why indirectly indicating that whatever we can do from a monetary policy angle or liquidity angle, we have already done it. Hereafter, it has to be by other forces. So, both private investment will have to get higher confidence and encouragement because of these rate cuts there, so that will increase the growth momentum and fiscal policy. Also, if further impetus is coming or public investment continues to be robust, then the growth trajectory could be more, so that is second.
Another caution which he has mentioned is relating to the international situation, even though today oil prices are very benign that is on the positive side, but the geopolitical situation can disturb the situation and the tariff related impact. These things have definitely been kept in mind and that is why you are right in the sense that for supporting growth now, the forces which will have to be encouraged are beyond the Reserve Bank.
