Monetary policy cut policy repo rates by 25 basis points and also revised inflation projection downwards
Serial entrepreneur Andy Dunn once said, "Passion provides purpose, but data drives decisions." Reserve Bank of India (RBI) Governor Shaktikanta Das seems to strictly abide by these words. Be it inflation, prompt corrective action (PCA) framework or future rate cuts, Das was prompt in his answer, ‘It will be data-driven’.
Several queries were raised on not just the rate action, but also on the inflation projections by RBI as well as the removal of three banks from PCA. In his interaction with the media after his maiden bi-monthly monetary policy as RBI governor, Das said any decision taken in the future will be based on ‘numbers’ and not ‘discretion’.
The MPC headed by the RBI governor has revised Consumer Price Index (CPI) inflation projections to 2.8 percent for Q4FY19, 3.2-3.4 percent in H1FY20 and 3.9 percent in Q3FY2020, with risks broadly balanced around the central trajectory.
Following this decision, several questions were raised on how RBI had got inflation projections wrong and whether it is time to change this model.
“We would not like to attach adjectives to our inflation projections whether it is optimistic or pessimistic. We work on the basis of numbers and our analysis threw up certain numbers,” said the RBI governor.
Similarly, his deputy (deputy governor) Viral Acharya, instead of being miffed at this remark, explained how RBI is, in fact, not out of line as compared to peers across the world.
“Internationally, if you look at inflation projection errors of various central banks, you observe two distinct patterns. Food is one volatile component in all economies. Also, where food is a bigger proportion of the basket, these are the central banks that tend to make larger errors,” he added.
Acharya also said if one accounts for the fact that the Indian food basket is volatile and has a large proportion in the headline inflation, they have found that relative errors the central bank here makes are not out of line with what happens in the rest of the world.
However, he was also quick to add that they (RBI) should take this criticism seriously and that they do.
Here too, he was quick to point out that RBI goes by whatever numbers are available and they also have sub-groups looking at individual food items for coming out with inflation projections.
Bank exits from PCA framework
Finance Minister Piyush Goyal in his budget statement last week said that he expects all banks under PCA to come out of it soon. This was after Bank of India, Bank of Maharashtra and Oriental Bank of Commerce were removed from the PCA list.
When quizzed about the timeline for other banks to exit the PCA framework, Das said there is no room for presumption.
“For those three banks that were removed from PCA, we watched their performance for the last few months on a few parameters. A detailed analysis was done which also took into account the capital infusion that was made by the government. Going forward too, all these decisions (removal from PCA) will be data-driven and there is no scope for ‘discretion’,” he clarified.
Banks that have non-performing assets above 6 percent have a capital adequacy ratio below 9 percent or have been loss-making for two consecutive years are put under PCA. Those under PCA face several restrictions including restrictions on non-core activities and lending.
Transmission and real interest rates
Two areas where the governor and his deputies did not provide a specific number were the real interest rate preferred by the central bank and the transmission (of rates by banks) targets.
“I have never been a fan of pinning down a specific number on these things. There is a little bit of a pre-occupation with what is RBI’s preferred real rate of interest. We don’t work with targeting a real rate of interest,” said RBI Deputy Governor Viral Acharya.
Similarly, considering the 25 basis points repo rate cut announced at the bi-monthly monetary policy on February 7, there were questions raised on how much would the actual transmission by the banks to their borrowers be.Instead of giving out numbers on how much of the cut should be transmitted in the form of lower loan rates by banks, Das said interest rate determination is left to the banks. They will be given the flexibility to fix their loan rates, he added.