Too Soon To Begin Monetary Policy Normalisation: HDFC Bank's Ashish Parthasarthy
After the minutes of the August Monetary Policy Committee were released, the debate over how soon policy will need to be normalised in India has taken center stage.
The minutes showed that at least one member—JR Varma—said it was time to withdraw the accommodative stance and start raising the floor on interest rates by hiking the reverse repo rate. Varma argued that this is important in order to maintain the MPC's inflation fighting credibility. A second member and RBI executive director—Mridul Saggar—hinted that normalisation could begin even within the accommodative stance.
RBI Governor Shaktikanta Das and Deputy Governor Michael Patra, however, remained focused on the need to support and strengthen the growth recovery.
Ashish Parthasarthy, treasurer of the country's largest private sector lender HDFC Bank Ltd., also said a move towards normalisation may have to wait a little longer.
"Pre-pandemic, there was a certain level of nominal GDP and aggregate demand and at that time, inflation was not so much of a worry ... Since then, aggregate demand has come down. Given that, I don't think inflation can be a large concern. So from that perspective, it is too early to go back to a normal policy stance," Parthasarthy said in an interview with BloombergQuint.
This should only happen once there is adequate comfort on the quarter-on-quarter growth trajectory, he said. "Only then we can correct some of the super accommodative policy."
The first step is the most difficult because it will signal clearly that you are moving away from super accommodative policies. And you can only take that first step if you are extremely certain. We need to be able to see sustained growth for at least four quarters down the road. Only then we can say that maybe it is time to take steps away from a super accommodative policy.Ashish Parthasarthy, Treasurer, HDFC Bank
"Even if we were to go back towards some kind of normal, it would be a very accommodative normal," Parthasarthy said.
The Reserve Bank of India's policy toolkit has included allowing large surplus liquidity to persist. At present, the liquidity surplus, including government cash balances, is close to Rs 11 lakh crore.
This surplus liquidity not only meant that the reverse repo rate of 3.35% became the operating rate, but, in some cases, corporates were borrowing even below that. To correct that, the RBI restarted and recently raised the size of variable reverse repo rate auctions, which help put a floor on market rates.
Is that the first baby step towards normalisation? Parthasarthy sees it differently. The variable reverse repo rate auctions are more to ensure that policy doesn't become even more accommodative than it already is.
Going forward, the RBI may look to raise the size of these auctions, he said. The move towards a hike in reverse repo rate would only come when the central bank decides to clearly signal a shift in policy.
I don't think a move in the reverse repo rate will happen this calendar year. ...When there is other stimulus to the economy is when they can start considering a hike in the reverse repo rate. It can happen towards the end of the calendar year too if the festive season goes well and the third wave is mild.Ashish Parthasarthy, Treasurer, HDFC Bank
A move up in the policy repo rate is a long time away, Parthasarthy said.
Apart from lower rates, surplus liquidity and open market operations, the RBI also introduced the G-SAP programme to keep long-term yields in check and support government borrowings.
Should the central bank continue buying bonds under the G-SAP programme even though it may add to already surplus liquidity conditions?
"I think liquidity is so much today that even if the RBI were to slow down G-SAP, I don't think the yield curve would go up much," said Parthasarthy. Surplus liquidity and low credit demand will push banks towards government securities.
The benchmark 10-year bond yield, after being kept down at close to 6%, has moved up to about 6.25% now. This, according to Parthasarthy, is broadly reflective of the economic and market realities. "It is reasonably fairly priced."
Watch the full conversation with Ashish Parthasarthy below: