Moneycontrol Pro Panorama | The RBI Governor’s gambit

Shaktikanta Das reiterates his cautious view on inflation.

Dear Reader, 

The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of. 

Speaking at the Bombay Chamber of Commerce annual general meeting, Reserve Bank of India Governor Shaktikanta Das said, “Like in the game of chess if you make one wrong move, you can lose the game, it is similar when you are dealing with the challenge of inflation." There’s nothing new about that remark—Das is merely reiterating his cautious view on inflation. But his speech needs to be viewed in the context of dissent among the Monetary Committee Policy members, where two of them now view real interest rates as too high. As MPC member Jayanth Varma said, this results in an unacceptably high growth sacrifice.

Governor Das, on the other hand, said at the Bombay Chamber of Commerce that India is at the threshold of a major structural shift in its growth trajectory and is moving towards 8 percent annual GDP growth in a sustained manner. On the other hand, he pointed to the slow pace of disinflation and to the fact that one weather-related shock could send inflation up again. He clearly seems to think that at present inflation is the greater danger, rather than high interest rates being a threat to growth.

At the last MPC meet, Ashima Goyal, one of the dissenters, specifically pointed to the argument that there is no need for a rate cut because growth is robust and said, “But growth is below potential and may slow further since consumption remains weak. Increasing income and employment is the only sustainable way to bolster consumption, as well as private investment. Transfers from a small percentage cannot give prosperity to a billion people. Reducing unemployment is important for political and financial stability. Without a rise in productive employment, aggressive redistribution becomes more likely and may provoke a flight of wealth taking India back to the stagnant seventies.’’ The reference to going back to the seventies is unnecessarily alarmist, but does she have a point about high interest rates leading to too much growth being sacrificed?

It's notoriously difficult to gauge potential growth and the natural rate of interest. Instead, let’s consider whether financial conditions today are restrictive and therefore, need loosening to spur growth. Take 10-year government bond yields in the secondary market --it’s currently around 7 percent, well below the 7.45 percent it was at in June 2022, when the repo rate was at 4.9 percent compared to today’s 6.5 percent. Similarly, the yields on AAA and AA rated corporate bonds are currently much lower than they were back in June 2022.  And the weighted average lending rates of banks are now lower than what it was in September 2019, before the pandemic. The inflows into the bond markets as a result of inclusion in international indices have resulted in yields staying low, and the government keeping a check on its borrowings has also helped. Indeed, if we consider market rates of interest, we’ve already had rate cuts.

Consider also the red-hot equity and IPO markets, including the SME IPO market, and it becomes amply clear that high rates of interest are not hobbling growth. Interest cover for the listed non-financial corporate sector, at an average of 4.94 for the March 2024 quarter according to CMIE data, shows that firms are perfectly capable of shouldering the interest costs. The debt-to-equity ratio for listed non-financial companies in FY24 was the lowest since 2011-12, as was the total outside liabilities to tangible net worth ratio, indicating very strong balance sheets.

On the other hand, note that the government has recently imposed stock limits on wheat in an effort to control rising prices. The State of the Economy report by RBI researchers pointed to higher cereal, pulses, edible oil and vegetable prices this month. What’s more, RBI’s latest Households’ Inflation Expectations Survey found that while households perceived that the current inflation rate has come down, they also believed that inflation would be higher in the next three months and the next one year than what they had estimated in the March survey. And with the monsoon being patchy so far, there is no reason to jump the gun and cut rates.

Moreover, if the central government feels that a push to consumption is needed in the forthcoming Union Budget, it has enough leeway to do so, thanks to the outsized RBI dividend payment. As a note by Jefferies says, “Ample cushion (40-50 bps) provided by a much larger RBI div. & tax buoyancy implies that the Govt can please everyone with higher capex, social spending and yet a tighter fiscal.” The government is in the enviable position of having its cake and eating it too. Simply put, there is no need for a stimulus, either monetary or fiscal.

At the Bombay Chamber meeting, Governor Das also said there cannot be any distractions from bringing inflation down at this stage, “because any distraction will severely compromise growth’’. That is the crux of the issue—bringing inflation down to a sustainably low level is the objective of all central banks, simply because it is the best way of ensuring long-term growth. In fact, economists have pointed to food inflation as one reason for tepid rural consumption demand. RBI deputy governor Michael Patra said in the April MPC meet, “Price stability has to be restored in order to ensure that the rising growth trajectory that India is embarking upon is sustained.’’

Investing insights from our research team

Vraj Iron and Steel IPO: How should investors approach this flotation?

Are MFI players staring at a bumpy road ahead?

LIC Housing Finance offers better valuation than peers

Tracker

Pro Economic Tracker: Consumer sentiment, power consumption improve but auto sales dip

What else are we reading?

RBI’s Das points to storm clouds over microfinance

Amara Raja’s risky yet compelling bet on L-ion batteries

Decoding Economics: Why the US wants to rewrite rules of international trade

Chart of the Day: The trouble with central government capex

Are the tailwinds for offshore wind power strong enough?

World headed for ‘food wars’ amid geopolitics, climate change, warns Olam (republished from the FT)

Political parties face the 'loyalty vs expertise' conundrum when dealing with consultants

Bangladesh-India Relations: Teesta treaty is a bridge too far and even a reset can’t redeem it

China’s military-industrial complex has a quality problem

Biden-Trump Debate: Whose economy would be better for middle class?

Markets

Sebi panel to discuss linking F&O exposure limits with individual risk profiles

Technical Picks: ICICI Bank, Axis Bank, Equitas SFB and Aluminium (These are published every trading day before markets open and can be read on the app).
Manas Chakravarty
Moneycontrol Pro