MC Interview | Barclays India's Rahul Bajoria: RBI is prioritising growth

The Reserve Bank of India (RBI) kept policy rates unchanged on February 10 and decided to continue its accommodative stance in the backdrop of elevated inflation.

The RBI is prioritising growth, Rahul Bajoria, managing director and chief India economist at Barclays India, told Moneycontrol in an interview. The central bank consistently emphasised maintaining an accommodative stance until sustainable growth is secured. Edited excerpts:

What is the message the RBI is giving out on supporting growth?

Since the beginning of the pandemic, the RBI has followed a policy of prioritising growth. The MPC (Monetary Policy Committee) has also consistently emphasised maintaining an accommodative policy stance until growth is secured on a durable/sustainable basis. Clearly, the growth slowdown that the country has endured during the pandemic is unprecedented and would require coordinated support from both monetary and fiscal authorities.

While evaluating the central bank’s measures to support growth, we must also consider all the moves it had undertaken over the last few years. In addition to keeping policy rates at low levels, the RBI has also undertaken significant liquidity infusion, provided subsidised credit to targeted segments, and also provided regulatory forbearance for sectors battered by the pandemic.

Such a growth-supportive stance from the central bank is consistent with our forecast of a short-lived hiking cycle with the terminal rate likely settling at 4.5 percent in the current cycle.

Since there is record borrowing from the bond market, how do you see the impact after the policy?

As governor Shaktikanta Das emphasised in the post-policy press conference, it’s important to appreciate that there is no extra/off-budget borrowing that is being undertaken this year. So, to an extent, the increased government’s fiscal deficit/market borrowing only marks a switch to the government’s account from the PSU side.

Now, as far the government’s borrowing plans this year are concerned, the RBI has reiterated its commitment as the government’s debt manager to ensure the borrowing programme is completed in a smooth and non-disruptive manner. The move to increase limits under the voluntary retention route to Rs 2.5 trillion (Rs 2.5 lakh crore) from Rs 1.5 trillion remains incrementally positive.

How much room does the government have to support economic growth?

We believe that the growth/revenue estimates presented in the budget are on the conservative side. Any upside surprise on revenue, which is very likely given the historical tax buoyancy for direct taxes in our country, could be used to further step up its expenditure. The government has prioritised capital expenditure this year and that remains a key positive due to the high multiplier effect. Further, the extension of Rs 1 trillion in loans to the state governments for capex-linked spending also could provide a boost to infrastructure and growth in the economy.

Do you think the budget will stoke inflation?

We do not think budget will stoke inflation pressures in the economy. Yes, the fiscal deficit has increased, but as explained earlier, a large part of the increase in headline fiscal deficit remains a switch from off-budget items to on-budget spending.

Will the RBI’s ‘contrarion’ stance put it behind the curve?

In fact, fiscal resources were used to reduce inflation pressures in the economy. Be it the tax cuts on motor fuels and duty cuts on imported edible oils, the government has utilised/sacrificed fiscal resources to ensure that retail price pressures remain contained.

Overall, we believe that inflation in India is currently largely driven by imported components and as such, we expect inflation to moderate to 4.5 percent in FY23 from an average of 5.4 percent in FY22. The rise in international commodity prices – especially crude oil – remains a source of key upside risk.