Monetary Policy Will Be A Tricky Balance To Ensure Stability, Says DBS Group’s Taimur Baig

The Reserve Bank of India will have to act responsibly and go beyond just injecting liquidity to ensure financial stability in the markets, according to DBS Group’s Managing Director and Chief Economist Taimur Baig.

“I do expect them to hike the rates and signal for more hikes in the future,” Baig told BloombergQuint in an interaction. “But the hike is about inflationary trends, while the liquidity injection in open market operations is about lending to be accommodating for a system that has issues in the non-bank financial sector.”

The RBI is facing a tough task. Concerns of a liquidity crunch in the banking system and the defaults at the Infrastructure Leasing & Financial Services Ltd. have already created nervousness in the credit markets. To top that, the Indian currency has slumped to an all-time low while crude oil prices are on an uptick. And as the Federal Reserve has raised interest rates to highest levels since October 2008, emerging markets are witnessing money flow back to the U.S.

Yet, Governor Urjit Patel has on numerous occasions stated the RBI is an inflation-targeting central bank. And India’s retail inflation is already below its mandated 4 percent target.

Baig said that as a central bank the RBI cannot turn a blind eye to the other developments. “International developments cannot be ignored and India is far more susceptible to international shocks in terms of trade shock, or capital flow shock,” Baig said. “Capital flows play an outsized role in exchange rate dynamics.”

Watch the interview here