Latha Venkatesh
The monetary policy due on Wednesday will in all probability be a no-action policy. The reasons are not far to seek: On October 7 when the monetary policy committee (MPC) met for its previous policy, the last Gross Domestic Product (GDP) number, that is for the first quarter of FY18, was 5.7 percent, the last CPI number, (for August) was 3.28 percent and crude prices were at USD 57.
Now, as the MPC meets again, GDP growth has inched higher to 6.3 percent for the second quarter, CPI has risen to 3.58 percent in October and crude prices have averaged USD 63 for the past month. Also in October, there appeared less chance of the government reneging on fiscal deficit than it does today. If the MPC didn’t find space to cut rates on October 7, it is unlikely to find reasons to slash rates on December 6.
While a rate cut now or for the foreseeable future is more or less ruled out, the MPC statement is likely to be parsed for how confident the members are about staying on hold, and how anxious they are to raise rates. Will they indicate discomfort with vegetable and crude prices? Will they worry even more about non-food, non-fuel inflation or what is called core inflation? (Incidentally, that too has inched up since the last policy).
While taking on board the crude price rise, there are a number of economists who worry that growth is not as robust as a jump from 5.7 percent in Q1 to 6.3 percent in Q2 would suggest.
Dr Pronab Sen, a former Chief Statistician of India, points out the April-June quarter saw serious destocking due to GST and the lingering impact of demonetisation. The July-September quarter saw a pick-up in GDP only because of restocking and some additional production to meet an advanced festival season.
He warns the GDP numbers could anyways be overstated since the traditional formulas governing calculation of the informal economy’s growth, by extrapolating from the formal sector, don’t work anymore in the post-demonetisation, post-GST world. Sen believes the informal economy has been handicapped for most of 2017 by a serious shortage of cash. The RBI, hence, should be generous with liquidity. “Sometimes RBI must use rates to drive liquidity; sometimes it must use liquidity to drive rates; clearly now, the latter is called for,” Sen told CNBC TV18.
Sen’s prognosis throws up an interesting issue: If all the three external members of the MPC were to think like Sen, can they get their policy implemented if there is no buy in from the three RBI members? Clearly not. The MPC has authority only to set the repo rate. It has no other tools. It can’t ensure that RBI keep surplus liquidity in the banking system to allow a less steep yield curve. It can’t change the cash reserve ratio nor is the RBI obliged to even seek the MPC’s permission when it cuts or raises the CRR.
Hypothetically, even if the three external MPC members write into their statements that they would like to see liquidity be kept abundant, RBI can easily disregard their wishes in its day-to-day management of the forex market and the government bond market. For instance, in the past 4 months, the RBI has sucked out Rs 90,000 crore from the banking system through open market sale of bonds. It has allowed the rupee to appreciate, despite building USD 31 billion of forward dollar positions. Both these have an impact on yields and the cost of money for borrowers.
Short point, the MPC is a pretty marginal policy committee. RBI is the continuous and perennial determiner of the cost of money. The appointment of an MPC doesn’t in anyway crimp this power, no matter what the predilections of its members.
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