Monetary Policy And The Mona Lisa Smile
In the Second World War, the Allies contacted the French Resistance with the code ‘Mona Lisa kept her smile’. Wednesday’s monetary policy announcement reflected this sentiment well, allowing Indian corporates to ‘keep the smile’ as the policy is not hawkish and leaves hope intact for the future. As Raghuram Rajan once put it, the policy shows that the Reserve Bank of India is neither a hawk nor a dove, but an “owl”, keeping watch on data prints as they evolve. Officially, the RBI called its policy stance ‘neutral’.
The expectations from the policy were more on the stance than on rate action. It was a 100 percent consensus that this time there will be no rate cut or a liquidity measure, but it will the monetary policy stance of the RBI that will be of interest to the market. The RBI's gross value added estimate, its inflation assessment, and the take on the economic environment would be of relevance, as those would govern market sentiment. The MPC has stayed true to the expectations on the rate front. It has maintained the status quo in the backdrop of upside risks to inflation, moderating growth, lacklustre credit and deposit growth, hardening government securities' yields, and rupee depreciation.
A laundry list of indicators shows mixed signals of health and threats. There have been mixed signals on growth over a period of time. While the April-June 2017 quarter showed a marked decline of over 200 basis points, compared to the corresponding period last fiscal; the slow pace reflected the impact of multiple transitions like demonetisation and the Goods and Services Tax, which are temporary. The Index for Industrial Production number for the month of July has shown that industrial output expanded by 1.2 percent, after a contraction of 0.17 percent in June.
On the agriculture front, recent reports indicate that the Kharif harvest will be lower this year than in 2016 for some crops, but still higher than that of 2015. Key crops like rice, maize, tur and soya are estimated to be lower. However, higher minimum support prices across the board should still help farmers’ cash flow. Oil prices have recently started moving higher again, and this has the potential to stoke cost price increases. The full pass-through of the Seventh Pay Commission is yet to happen. On the financial markets front, the excess money in the system is characterised by the reverse repo outstanding which is close to Rs 2 lakh crore.
Interestingly, while bank deposits are showing flat growth, the mutual funds are showing accretion, in light of better returns as compared to bank returns.
Good policy is a process and not a state of being. Being committed to inflation targeting while leaving the door open for the future is good policy and process.
The RBI policy is not without some excitement in the small print.
The cutting of the Statutory Liquidity Ratio by 50 basis points to 19.5 percent may not be immediately relevant but is in tune with the commitment to progressively reduce the preemption of lendable resources and make them available to non-government borrowers.
In times of surplus liquidity – as is now – it means little, but will prove to be accommodative in times of a credit squeeze.
The commitment to the creation of electronic platforms for financial instruments regulated by RBI and forex trading platform for retail users are great financial market initiatives for fair pricing and governance.
The interoperability of prepaid instruments is a well-timed move which will help individuals reduce idle balances.
The other initiatives like the internationalisation of the rupee, an external benchmark to replace the marginal cost of fund based lending rate, and legal entity identifier, etc. are all good process measures to make the Indian financial system sound.
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In a world, which places a premium on growth, India’s potential to clock 8 percent growth is one of the bright spots. This will enable India to take its rightful place at the global high-table. This brings a responsibility on India to pause and reflect on ways to reach that potential of 8 percent growth, in order to take people over the poverty line, and ensure a fair distribution of the economy between Bharat and India. Given the importance of realising this potential growth, positive cues from all stakeholders are required. In this context – as the RBI has rightly pointed out – actions in the area of stalled projects, ease of doing business, capitalisation of banks to absorb bad loans, and affordable housing, are absolutely important. There is an onus on those shaping monetary policy to offer cues with a rate cut.
Given how the rest of the world ensured a soft-landing after an even more painful problem, India has to take a few thought-through bets.
So while we appreciate the RBI's ‘pause’, we would urge that growth is also focused on, in a scenario where the other indices are generally under control. This way the Mona Lisa can continue to keep her smile.
VS Parthasarathy is the Group CFO at the Mahindra Group.
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.