ANALYSIS RBI MPC Analysis: Forget Rupee, focus on growth - the straight message from RBI Governor

Reserve Bank of India

It was a nail biting finish to this year’s monetary policy. In the run up to policy, the expectation was loud and clear – a 25 basis points (bps) rate cut. But as the situation gradually unraveled, signals became mixed and towards the end, it was almost certain that from a rate cut expectation we were in for a long pause. This is exactly how a thriller movie feels to its audience, right. But only the director know how the story will end and he isn’t compelled to change the climax, no matter what others think.

December monetary policy was exactly like that.

Incoming data on inflation and GDP growth and not to mention, how Indian Rupee threw a spanner in the works, gave signals that a rate cut isn’t the need of the hour. Nonetheless, sticking to the original script, it was a 25 bps rate cut. Not that just, there was no mention of any concern about Indian rupee flirting the 90-mark to the US Dollar and irrespective of how trade negotiations conclude, the government termed it as just an upside to growth. In other words, prolonged tariff imposition by the US government isn’t a reason enough for India to flinch. Domestic growth, propelled by GST rate cuts ahead of the festive season is good to keep the momentum elevated.

Will support growth at all junctures

A 25 bps rate cut should be seen as an ammunition extended by the MPC to sustain and improve the growth momentum. Various statements made by the RBI Governor reiterate this aspect. For one, the MPC has retained its neutral stance implying that there is room for more rate cuts. The attempt to bolster systemic liquidity is yet another point in that direction. In the press conference post the policy, Sanjay Malhotra, Governor, RBI, clarified that the intention of open market operations (OMO) and dollar-rupee buy-sell swaps is to ensure that there is adequate durable liquidity in the system and wherever that is just transient supply of money, the central bank won’t hesitate to suck it back from the system. The governor also called out that the 0.25 percent inflation print is also not comforting. Four percent is the ideal number he would like to see. What the two comments means is that he wants the economy to grow and banks to front-end the growth. Macro uncertainties should be a stumbling block in the process.

Hoping for a better year ahead

Funds should be deployed towards credit growth. That the main objective of reducing the repo to 5.25 percent (down by 125 bps) since his first monetary policy. To his favour, from a mid-single digit, credit growth is now around 11 percent. The 25 bps rate cut along with a begin taxation regime, both on personal and indirect taxes front, would psychologically enable consumer to borrow from banks to spend it on asset building. Having said that, he didn’t seem to favour growth which is not calibrated. Simply put, he think that credit outpacing GDP growth by two-times, which is global thumb rule, is a sustainable growth strategy for banks. His message therefore is clear – grow, grow faster, but carefully. Don’t grow too fast at the cost of asset quality. That is why he didn’t see worried that the RBI estimates of real GDP growth was a few notches lower than the real print of 8.2 percent. Perhaps with the 25 bps cut ahead of the holiday season, the New Year seems to hold promise.