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Last Updated : Jun 06, 2016 07:36 PM IST | Source: CNBC-TV18

Citizens monetary policy panel: RBI to hit pause on rate

CNBC-TV18 has constituted its own citizens monetary policy committee to shadow the Reserve Bank of India's policy. At the inaugural panel meet, members agreed that the RBI will keep its rates unchanged.


The Reserve Bank of India (RBI) is expected to present its monetary policy review tomorrow, probably the last where the central bank governor will take a call on interest rates. From the next meeting onwards, decisions will likely be at the discretion of a six-member monetary policy committee (MPC) that the government and the central bank have jointly formed. Towards this, CNBC-TV18 has constituted its own citizen’s monetary policy committee to shadow the Reserve Bank of India's policy.

The role of this committee is to shadow the RBI policy making machine. This citizens committee will meet on the eve of every RBI credit policy meet and advise on the best way forward.


Dr Pronab Sen, Chairman of citizen's monetary policy committee, said he doesn't think growth needs a real help at this time from the monetary policy side. "In the short term, there can be price pressures." He also spoke about liquidity in the system. He said while outflows are inevitable, it is best to keep our weapons oiled.

Samiran Chakraborty, chief economist at Citi, said positive news on inflation is that the monsoon forecast has been normal. The minimum support price increase has been benign, he said. Both these factors should make sure inflation over summer remains benign.  That is what gives the RBI comfort that it will meet its inflation target. 


Soumya Kanti Ghosh, chief economic advisor at SBI, said if one goes by growth numbers, the monetary policy doesn’t warrant any action. On the ground, there are upside risks to inflation, he added. He expects the RBI to keep inflation down to 5 percent by January 2017.

Sajjid Chinoy, chief economist at JP Morgan, said oil prices have moved up beyond what the RBI had anticipated. Food inflation will have to go down later to offset increase in oil and commodities. The focus this year will be on transmission and making sure that the past rate cuts are transmitted, he said.

Sonal Varma, economist at Nomura, said most of the factors that drove disinflation are behind us for the last 18 months. Varma says that the RBI could keep its work on the inflation target of 5 percent. 

Everyone expects the RBI to keep the rate unchanged in tomorow's credit policy meet.

Below is the verbatim transcript of Pronab Sen, Sajjid Chinoy, Sonal Varma, Soumya Kanti Ghosh and Samiran Chakraborty’s interview with CNBC-TV18's Latha Venkatesh.

Q: First up, how would you analyse the growth and the inflation trajectory in which the policy is going to be framed. Do you think growth desperately needs help or do you think inflation at the moment is at a stage where it can afford another cut?

Sen: Frankly you have put me on a spot because as a committee this is something we need to discuss. We will have very different perspective on both the growth and inflation stories. Now, insofar as I am concerned I frankly don't think growth needs any real help particularly at this point in time from the monetary policy side. And as far as inflation is concerned although because of the reports on the monsoon there are expectations that the price pressures would be muted. Nevertheless there are still some time to go before the effects of the monsoon are really felt and in the interim, the short run there can be prices pressures which we may have to be a little wary about.

Q: How do you assess the macroeconomic situation in the country especially the inflation scenario? Do you see RBI's estimate of 4.9 - 5 percent by January 2017 being at risk?

Chakraborty: In our view, the positive news on inflation front is that one, the monsoon forecast has been normal. In fact the second positive news is the minimum support price (MSP) increase even for this year has been pretty benign. So both these factors as well as the general deflationary process that has been continuing on the food inflation front for a while now should make sure the food inflation over this summer stays relatively benign, and that's what gives us some kind of a comfort that RBI should be able to meet its January 2017 inflation target, in fact that could be a tad below that.

However of late, some of the upside dress have shown up. One of them is that global commodity prices are up about 10-15 percent from their April lows in particular. Sugar is up almost 30 percent. The other risk that we are seeing is the core inflation is very persistent and on top of it the Gross Domestic Product (GDP) data is showing a huge diversion between consumption growth and investment growth which could become inflationary at some point of time. And we obviously still don't know when the seventh pay commission impact is going to come and there are also some base effect related distortions around July and August.

So, keeping all this in mind the tone of RBI would be very interesting that whether they are seeing upside risk to their inflation forecast. At this moment we think the risks are pretty much balanced and that's why we want to see how inflation progresses for the next 2-3 months particularly on the food inflation front and then take a call after that.

Q: Taking off from what Samiran is saying, he says the risks are balanced but clearly we have seen food inflation go higher. I am not terribly worried about the global commodity prices just yet but correct me, anyway they didn’t get passed on so much, would you worry that 4.9-5 percent in January is at risk, do you see that Reserve Bank of India (RBIs) fan chart getting shifted upward at all?

Chinoy: It is a bit premature to say the fan chart itself will shift with this policy but I think any downside risk that existed back in February, March and April has kind of disappeared right now. Remember the RBIs forecast for oil in this year is USD 40. At USD 50 we are already 20-25 percent above that forecast and the RBI itself estimates for every USD 10 increase above the forecast, you are looking at a 20-30 basis point increase in headline consumer price index (CPI). So, I think for starters, oil prices have moved up beyond what the RBI thought they would.

Secondly, they had forecasted inflation to be around 5 percent, they said with inter-quarter variations. April was at 5.4 percent, we suspect May is going to be close to 5.4 percent, June could be 5.5 percent. So, at least in the first quarter of the fiscal year, you could be 40-50 basis points above what the RBI had thought it would. All this does is raise the bar for what the monsoon has to do. Now, let us be clear here, there is no direct easy correlation between normal and strong monsoons and food prices but starting conditions matter, you are coming off two successive droughts so there will be various factors that play.

What needs to happen is food prices need to or food inflation needs to go down later in the year to offset any increase from oil or commodities and ensure that we are at the 5 percent mark. So, I would conclude by saying the margin for error that the RBI thought perhaps existed two to three months ago with commodities, oil at USD 30 has clearly evaporated. It is going to be much closer than we thought which means the space for any easing down the road if any existed is much more limited at this point in time. Therefore, considerably the focus this year will be much more on transmission, making sure past policy rate cuts get pushed into market prices, bank rates rather than much more easing from now on.

Q: Dr Sen started by saying that growth really doesn’t need monetary policy help at this point in time. What is your sense as representing the biggest bank as well? Is growth in such a situation that it needs monetary policy help?

Ghosh: No, I think I broadly tend to agree with what Dr Sen said in terms of the growth. If I go purely by the growth numbers, I think as of now the monetary policy doesn’t warrant any action even though on the ground the scenario is a little bit different because things are picking up but not picking up at the pace what the data suggests. So, that is regarding the growth.

Regarding the inflation trajectory, I think I tend to differ a little bit because, yes, there are upside risks to the inflation projections which have appeared since the RBI did the last assessment. However, here is an interesting proposition, if you actually go through the data, the current increase in oil prices if you break it up into two halves, the first half of the calendar year and the second half of the calendar year and if you go through the last two years data, you will always find that the oil prices tend to rally in the first half and that rally actually subsides significantly in the second half.

So, if that is the case and given the fact that the US growth, the employment numbers which came in recently were not that strong, I have a feeling that the oil prices could actually go down from that level. So, if that is the case, then the upside risks which you are talking about in terms of the commodity prices, may not be that significant and that would continue to exert a little bit downside impact on the inflation numbers.

Q: You expect the inflation number to be at 4.9 percent January 2017?

Ghosh: I think as of now even there is a little bit of elevated risk, but I think RBI is comfortably placed in reaching the 5 percent inflation target as on FY17, because please remember as far as the food prices is concerned there is a big elephant which is the pulses and which had contributed 100 basis point.

Q: Two questions to you because we may not have time to come back to you on that. Your inflation trajectory is RBI’s trajectory in danger or rather risks balance and more importantly how much do you think the Reserve Bank is going to concentrate on transmission therefore your thoughts on the liquidity scenario?

Varma: On inflation I think most of the factors that drove disinflation are behind us and we keep obsessing month on month (MoM) numbers and towards the end of the year base effects are positive and therefore year on year (YoY) inflation will come down, but for the last 18 months we have not seen any disinflation and basically there are 3-4 factors that have driven disinflation, minimum support prices coming down, rural wages coming down, output gap being negative, oil prices coming down and all these factors have already played their role.

There aren’t very clear factors that look like will incrementally add to disinflation going forward and therefore as far as the RBI’s trajectory is concerned, we are broadly on track to meet 5 percent by March 2017 with risk to the upside once the Pay Commission clearly gets implemented and absolutely no correlation between monsoon, rainfall and food inflation. We have seen that in 2009-10, we have seen that in 2002-04 when despite bad monsoon food inflation was low and we have seen it in the last two years, where despite bad monsoon inflation has remained quite subdued, I think the expectation that because monsoons will be better food inflation will come down may not necessarily hold true and the moderation we are expecting on inflation is purely on transitory base effect factors underlying there is no disinflation, so on inflation on target with some risk on the upside.

The big focus and which is what you mentioned has to be on transmission. Base rate at 9.5 percent with repo rate at 6.5 percent or even if you look at the one year T-Bill rate which is the risk free lending at 7 percent, 2.5 percent kind of a risk premium is extremely high by historical standards. Now whether that because of liquidity conditions which the RBI said they are going to tackle and they have been tackling or if because banks are just tightening the lending standards because of non-performing asset (NPA) issue, the focus now from a purely growth inflation dynamic perspective, we are were where we should be on the repo rate.

The focus has to be on how to compress the risk premium going forward through policy actions whether liquidity or could be more regulatory issues with respect to NPA etc., but that is where the bank for the buck has to come from going forward.

Q: What should the Reserve Bank worry about and from now to the remaining part of this calendar do you think the global scenario is going to give the Reserve Bank much elbow room to cut rates?

Sen: Well it’s not a question of rates at this stage. The real question that I think should exercise the Reserve Bank is what is the stance that you take on liquidity, because the likelihood in terms of the global development is not so much a rate issue. It’s not the question of trying to retain funds within the country. It is much more that if an outflow is inevitable, how do you look at the liquidity consequences of these events and that will prepare for that because the kind of changes that can happen can be fairly sharp and you may be caught napping unless you are already prepared for it and that really I think is the big issue. It’s keeping your weapon oiled.

Q: What is your assessment of the liquidity situation right now?

Chakraborty: Our sense is that liquidity has improved over the course of the last couple of months. In fact the extent of RBI, OMOs over this period has been more than what we were estimating. However still there is a core liquidity deficit. Very interesting would be that seasonally from June-July the currency in circulation starts coming back into the system. How quickly this leads to a situation where the core liquidity deficit is wiped out and we move to some kind of a surplus liquidity situation is something which will be very important to see. Our sense is this can happen at the backend of July and if that is the case then probably the extent of OMOs needed at that point of time would be much lesser. So, how RBI smoothens out the OMO process over the course of the year is something which markets will be very closely watching.

Q: I wanted your view on this arithmetic, the cash loss that is people withdrawing cash and therefore not available to the banking system is at least Rs 25000 crore. Even if we keep it conservatively Rs 20000 crore per month, that has to be replaced, there is an existing inherited deficit of about Rs 60000 crore and when this USD 30 billion move out of the system, RBI will sell dollars, it will suck nearly Rs 2 lakh crore. How much can RBI buy? Can it really wipe out this deficit?

Chinoy: Let us separate the secular issue from the idiosyncratic event in September. Our sense is total currency in circulation plus the CRR recreation means about USD 2.7-2.8 trillion for the full year. You are starting with a core deficit of about Rs 45000 crore. So, about USD 3.2 trillion. It is keeping that run rate in mind that in the first quarter they have done about Rs 70000 crore OMOs which if you look at the annualised run rate approaches that number - more than market expected.

In addition because of the FX intervention so far they have already bought Rs 40000 crore, Si, you have seen about USD 1.1 trillion in the last 2-3 months. So, RBI is clearly signalling that they are cognizant of the magnitudes at hand and over the course of 12-17 months they will wipe this out.

It is important to understand the core deficit needs to go to a core surplus to offset average government balances with the government. So, that the system goes into balance. You need the system to be in balance to get the near term impact on treasury bills softening.

Q: So, how much have they to buy?

Chinoy: Which is why the governor was right in saying this is a new regime, let everyone take a deep breath. This will take a year or more than a year to do. Markets have to read the signals here that the RBI is now committed to gradually taking the core deficit to zero and therefore the system deficit to sero.

Our estimates are once you do this the quantum of OMO's required and the fact that the interbank deficit is zero means the entire yield curve perhaps shifts down by about 25 basis points. So, in equilibrium this is tantamount to a 25 basis point rate cut both at the short end and at the long end.

So, clearly the impact on whole markets will show up at some length of time. The important one is that it is still not clear that you are going to see transmission into banks. If currency in circulation stays high and deposit growth doesn't pickup then what you will see is banks would be much less inclined to cut deposit rates and if they can't cut deposit rates then it is harder to cut lending rates.

Q: Will banks cut only if they stop borrowing from the repo window, only if the deficit comes to zero?

Ghosh: There is a fundamental point over here. If I just take into account all the arithmetic which is going on and given the fact that RBI has actually brought down the core liquidity deficit significantly in the first two months, the point over here is that the banks also need to take a long term view. You are now in a MCLR regime. MCLR regime means every month you have to revise the lending rates and that is a process which is already in public domain. So, every month you will see banks revising the lending rates.

If I keep aside the lending rates and deposit rates separate, I think deposit rates the banks problem could be a little more compounded going forward because in August-September if we see those liquidity outflows because of the FCNR(B) redemptions banks actually would be hard pressed to cut deposit rates so as to protect their base. So, my concern is as of now the transmission is actually happening on an incremental basis. Every month you are seeing banks are getting 5-10 basis points on that MCLR front. However going forward whether that window will exists because of the forthcoming FCNR(B) outflow that will remain the million dollar question as of today.

Q: If the RBI really were to do so many OMOs, is it at some point endangering its inflation fighting mechanism altogether?

Varma: By committing to bring banking system deficit to neutral and not system deficit to neutral the amount of liquidity injection that the RBI needs to do is obviously quite significant. In a sense the RBI has put itself in a tricky situation because if the government doesn't spend then to bring the banking system liquidity to neutral, they will have to do substantial amount of liquidity injection through OMO and through other measures and the effective reserve money creation that they might end up doing could be much higher than what is consistent with their inflation projections. So, I think we are still fighting yesterdays battle which is how to get transmission going but this is something that could become a challenge going forward in that the liquidity regime being a bit inconsistent with the inflation forecast that they have.

Q: Pick up your pens and write your vote on the pluck cards. I will come to Dr Sen last because as the chairman he will get the casting vote in case it is split but first Samiran, what is your vote?

Chakraborty: No Change.

Q: Sajjid what is your vote?

Chinoy: Pause.

Q: Sonal what is your vote?

Varma: Pause.

Q: Soumya Kanti Ghosh what would you advise the RBI to do on rates?

Ghosh: No Change.

Q: Will the chair want to differ or agree?

Sen: No Change.

Latha: The Citizens’ Monetary Policy Committee initiated by CNBC-TV18 voting that they don’t want the RBI to hike or cut rates at the committee meeting tomorrow but clearly they have all told us that they will be very closely watching what the RBI will be doing on liquidity and saying on liquidity, whether it will be bringing the liquidity deficit in the system to zero and by when as well as Dr Sen pointed out there are international tremors and therefore what and how the RBI intends to do to reduce the liquidity deficit when that USD 30 billion is pulled out in September is the other thing that the monetary policy committee will very closely watch out for.


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First Published on Jun 6, 2016 05:58 pm
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