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Eighth EGROW Shadow Monetary Policy Committee Meet


Summary of Discussion by Members of the EGROW Shadow MPC

1. Dr. Arvind Virmani, Chairman EGROW Foundation

GDP growth has likely bottomed out in Q2 or at worst in Q3 of FY 2020. Speed of recovery to potential Growth of around 7.5% will depend critically on policy actions by Govt and RBI. Inflation acceleration will be temporary because its driven by vegetable supply shocks which always reverse. RBI must do all it can to unclog the channels of credit to Households and SMEs and ensure Medium Long-term liquidity and sustained increase in monetary base. Management of higher capital inflows can be used for this purpose as also to ensure competitive ness. Till economy recovers to sustained 6% plus, an elevated level Fiscal- Monetary coordination is warranted.

2. Prof. Ashima Goyal, IGIDR and Member, PMEAC

The budget has stayed within the FRBM limiting borrowing requirements and the fiscal stimulus, and made attempts to improve the quality of its expenditure as well as continue with supply-side reforms. This gives both the space and the need for monetary policy to cut further.

As the MPC acknowledged, there is space for further cuts, as the food price spike is expected to be temporary, and core inflation is below target. Under inflation targeting the rate is set based on expected future inflation. There is a need for further cuts since the output gap is negative.

My recommendation is for a 25 bps cut to the Repo.

The MPC, however, may want to wait for further softening of food price inflation. Moreover, there seems to be a lower bound to nominal interest rates in India, which is above zero. Banks are finding it difficult to cut rates on deposits. There are social welfare implications of lower rates.

My prediction is the MPC will pause in its February meeting.

Just as, when nominal rates hit their lower bound, advanced country central banks turned to quantitative easing, the RBI needs to keep liquidity in surplus. This will help pass through of its existing rate cuts as spreads reduce.

The ten year G-Sec rate has softened after the budget. RBI’s operation twists have also contributed. A fall in interest costs in the last year has helped government finances.

RBI may also consider expanding its balance sheet if necessary. The FRBM mandates RBI support of government borrowing if the escape clause is triggered. Coordination of fiscal and monetary stimulus is essential to revive growth.

3. Indranil Sengupta, Chief Economist, Bank of America Merrill Lynch

We expect the RBI MPC to repeat a dovish pause on February 6. Although inflation is peaking off (to 6.7% in January) on falling onion prices, it still remains above the RBI's 2-6% mandate. A saving grace is that core CPI inflation has actually slipped to a lowly 3.1% in December. With growth weak, we expect the RBI MPC to cut in April if inflation retreats to 4-4.5% by March with onion prices falling and base effects reversing in February. It should also draw comfort that the Center has contained the fiscal deficit at 3.5% of GDP. While we see 30bp of upside risk, fiscal policy should surely be counter cyclical with growth well below potential.

4. Ms. Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank

The Union Budget while continuing to focus on the long-term structural reforms has been unable to address the concerns on the immediate drag on demand to revive the economy. Given the limited resources government utilized whatever wherewithal they had. Meanwhile, the high frequency economic data has started to show some early signs of stability but we expect a very slow and prolonged recovery. The challenges from tepid consumption demand, private investment, exports and credit squeeze for select sectors continue to weigh on the economy. We see downside risk to our FY20 GDP estimate of 4.7% and expect FY21 growth near 5.5%.

While the slowdown has become more persistent, unfortunately the headline inflation has been overshooting the MPC’s target upper band of 6% and is expected to continue for the next few months. We expect the food inflation to begin to moderate henceforth with improving supply but not enough to drag down the trajectory to comfortable levels. Meanwhile, the core price pressures remain tepid but one-off telecom tariff hikes has led to an uptick in core inflation too. For the next 4-5 months we see headline inflation hovering above 6% limiting any easing possibility atleast through 1HFY21. The food inflation trajectory becomes important in deciding the future course of policy actions. Any case, at this juncture my sense is a little tweak in interest rates will not have any impact on propelling growth. Instead, I would hope that government should begin front loading expenditure from the beginning of the year to aid growth and also to ensure smooth execution of various measures. I therefore expect and recommend the MPC to stay on hold both on rates an stance. Unless the MPC framework is tweaked, it would be difficult to go for further monetary easing even if growth remains a challenge. In this environment I would expect the RBI to ensure that the forward guidance and liquidity to remain in abundance to avoid any frictions.

5. Mr. Abheek Barua, Chief Economist and Executive Vice President, HDFC

Inflation jumped above the RBI’s comfort zone in December 2019 and is likely to print above 7% even in January 2020. This increase has been driven by domestic supply disruptions, leading to a spike in vegetable prices (especially onions). However, its not just an onion story, with the rise being more broad based, influenced by increasing global food prices. Moreover, while demand side pressures remain weak, one-off price revisions and rising inflation expectations are starting to put pressure on core inflation (excluding food and fuel) as well. We expect inflation to moderate only gradually in FY21, with a below 4% print likely only by the second half of the year.

The RBI naturally is faced with a difficult choice with inflation remaining elevated and growth slowing down. For now, we expect the RBI to stay on hold and keep its stance unchanged (accommodative) at tomorrow’s meeting. However, going forward, we think that the scales could tip in the favour of growth as soon as inflation prints become more palatable. The RBI might look through the volatility in inflation and lay emphasis on the wide output gap, delivering a cut perhaps as soon as June 2020. Given the fact that the Union budget did not provide significant counter-cyclical stimulus to boost consumption and is unlikely to be inflationary, the case for further monetary policy accommodation has become even stronger. On liquidity, we expect the central bank to keep liquidity in surplus, in order to support growth, as the monetary implications of surplus liquidity are likely to be limited on inflation for some months to come (given moderate credit growth).

6. Dr. Charan Singh, CEO and Director, EGROW Foundation

The Union Budget with very wide-ranging reforms has been announced on Feb 1. The markers are yet to capture the reform-based measures announced in the Budget, as is reflected in the movement of the BSE SENSEX. The geo-political situation is complex and uncertain with Brexit just completed, and China recording an onslaught of virus attack, which is expected to have massive impact on China and global economy, through spill overs. Domestically, the growth has slowed, probably bottomed out, and green shoots are appearing after Governments announcements in September/October of 2019. The CPI/WPI has recorded an increase, but as is well known, mainly because of food items, and this phenomenon should be of short duration. Globally, oil prices will also pass through uncertainty, with slowdown in demand in China, and the US-Iran issues.

In these uncertain times, Fed Reserve, Bank of England, and the Reserve Bank of Australia have kept their rates unchanged. In view of the market situation, it may be appropriate that the RBI should continue with the current Repo rate, and accommodating stance.

Summary of Discussion by Industry Experts/Economists

1. Dr. Manoranjan Sharma, Former General Manager, Chief Economist and Chief Learning Officer (CLO), Canara Bank.

This Policy would be formulated in the context of difficult domestic and global conditions. To be sure, the long-term Indian growth story is intact and India continues to be identified as a bright spot in the global economy. But the Indian economy is in the midst of a pronounced slowdown clearly discernible in the 5 per cent growth, marking six consecutive quarters of slow growth reflected across segments and sectors.

Some such indicators are the slump in the automobile, real estate, fast-moving consumer goods (FMCGs), first fall in direct taxes in at least two decades, GST collections unable to reach the budgeted levels and investments, both private and public, steeply declined to a 15-year low in quarter ended June 2019. There are also important issues of boosting employment and growth; advancing education, skills and job creation; providing a renewed thrust on infrastructure and investment; promoting agriculture and farmers welfare; developing the rural sector; meeting the needs of the social sector including health care; developing financial sector reforms; streamlining governance and ease of doing business; and resource mobilization for agriculture and rural economy.

In this grim macro-economic scenario, breaking the vicious cycle of slowdown and promoting the virtuous cycle of steady growth and development is, by no means, easy. Where do we go from here? Given the evolving macro-economic situation and rising inflation, the choices are difficult and involve trade-offs, reconciling claims of competing sections and segments and grappling with the issue of promoting growth or not breaching the mandated inflation numbers. While these factors complicate the task of economic and monetary management, the retail inflation for Dec 2019 peaked to a 64-month high level at 7.35% as compared to 5.54% recorded in Nov 2019. Core CPI stood at 3.73% as against 3.48% in Nov 2019. Food inflation continued to spike and recorded a 6-year high price rise of 12.16% (yoy) and 2.11% (mom) in Dec 2019. Fuel inflation recorded a yoy rise of 0.70% and mom rise of 0.63% in Dec 2019. WPI inflation rose to 2.59% in Dec 2019 as against 0.58% in Nov 2019 largely on account of larger unfavourable statistical base. Given the evolving growth-inflation trade-off, the RBI is likely to continue with its “accommodative” stance.

The limitations of the monetary policy measures also need to be realized for a comprehensive assessment and perspective. For, despite the cumulative cut of 135 basis points effected by the RBI in the Policy rate in calendar year 2019, the lending rate has declined by only about 50-bps. The issue of delayed and inadequate transmission of rate cuts into the credit market, specifically bank lending makes a strong case for a pause on the Policy rate front. The panning out of the full impact of the recently announced Union Budget proposals reinforces the case for a wait and watch approach.

It has also to be realized that in the ultimate analysis, monetary policy must move in tandem with fiscal policy to perceptibly alter the ground realities.

2. R.K Anand, Ex Member, IBA Monetary Group and Former Chief Economist, PNB

Repo Rate: Repo Rate is expected to remain in state of pause since the increase in CPI which is driven by food prices is a short run phenomenon and likely to normalise with the incremental supplies of fresh vegetables especially onions.

Prices: Prices are seen moderating setting expectation of softening of oil (to hover around $ 55 / 56 per barrel) and commodity prices due to weaker global growth and pull down by the China’s lowering of production due to exodus of workforce and investors scared by coronavirus. The situation may take a quarter’s time to normalise.

Employment: Low growth, low inflation may slacken the pace of employment due to deceleration in manufacturing and slowing services sector. Labour Migration is seen to farm and construction sectors where the disguised unemployment may increase.

Wages: Nominal wages may remain stagnant or get very low increase due to growth and employment narrated above. Softening of inflation day by day from here onwards may have the effect of real wages to rise.

Consumer Spending: It’s seen increasing at slow pace in H1 FY20 due to tax payments due during the current quarter and not so great increase in nominal income of the consumers. The pace of banks’-induced consumer spending through credit cards and personal loans may slacken due to growing concern over increasing delinquencies. Inducement to consumers to spend more under proposed new tax regime may take long time to decide that too most likely in annual income segments above Rs.15 lac. Short term need to accelerate consumption has lesser probability.

Real Estate: Demand for new houses in segments Rs.75 lac and above is seen very low, it is seen in Rs.30/40 lac segment in Tier II & III cities or Periphery of NCR & Metros. Private sector banks are seen prone to fresh slippages in non-performing mortgage based loans due to prolonged stagnant wages and rising cost of living.

Fiscal Development: Govt. & RBI are seen to be focussed on liquidity where debt market may be encouraged to be catalyst for arrangement of liquidity. Banks may also join the other players in raising long term resources through secured mortgage bonds and infrastructure bonds. Low increase or deceleration in some items of revenue Receipt of Funds side is seen to remain under pressure thus causing higher than the stipulated level of Fiscal Deficit.

Stance: Stance of Monetary Policy is seen to be accommodative, supplemental to Fiscal Initiatives initiated by the Govt in the recent past and current budget. ‘Central Focus’ of RBI may remain on Liquidity to facilitate the growth. Dynamics is seen to enhance liquidity through OMO, FDI, Foreign Remittances, LCR, HQLA, CRR & SLR.

3. Dr. Naliniprava Tripathy, Professor (Finance) IIM Shillong

After the Budget, the market is keen on monetary policy guidelines for the upcoming year and more so for the first quarter of the financial year 2021. It is incredibly imperative to implementing policy to increase consumer and industrial demand for goods and services — some of the aspects essential to be considered in deciding the policy rates way forward. Industrial production for November2019, increased 1.8% sequentially over October 2019 and this was the first positive sign of rebound following a three month of the simultaneous slump, the growth in November 2019 was led by the manufacturing and mining sector reporting an upside of 2.7% and 1.7% respectively. The core sector (forms 40.27% of the weights of items included in IIP) growth for the period of Apr-Nov 2019 was zero as compared to 5.1% for the similar period in 2018. Hence, despite the core sector recording a negative growth of 1.5% in November 2019, it was welcoming as there are specific sectors like fertilizer and cement that have registered growth. The slowing of deceleration in the core sector can be the silver lining for the Q1 of 2021, as not much is expected in terms of the turnaround in the last quarter of 2020 other than the base impact.

Consumer Price Inflation for December jumped to 7.35%, breaching the benchmark rate of 4% (with a margin of 2% on either side) set by RBI and recording a 5th consecutive rise. This was mainly because of upward pressure from the cost of food and beverages; however; the core inflation was 3.7% for the same period. This momentary spike should not be a significant concern as the rise was on account of seasonal influx and hence will be cooling off subsequently in the fourth quarter of 2020. Brent prices went down below $60, a barrel at the end of Jan’ 2020 almost after 14 months of a rally. This will be guided in future by the next OPEC meeting, which is slated to be conducted in March this year and the UK-Iran tension; however, the declining price trend along with focus on alternative energy sources, Coronavirus outbreak in Wuhan, an overall slump in major global economies can be presumed to keep the prices lower in the coming future till further improvement in the status quo of the current factors.

There has been a sharp drop in terms of exports from April – December 2019. Exports slipped from 1.96% to $239.29 billion against imports of $357.39 billion. Further, the exchange rate with USD has appreciated from December 2019 levels in the last two months. In this context, expansionary monetary policy will result in currency depreciation giving exports more thrust. Therefore, keeping the expansionary policy is of utmost importance at this point.

In its first advanced estimate released in January 2020, the Central Statistics Office has pegged the economic growth for 2019-20 at 5 percent, followed by IMF’s downward revision of the growth forecast to 4.8 percent blaming the current NBFC crisis and sluggish rural demand. RBI, too, has revised the estimates downward to 5 percent from its earlier prediction of 6.1 percent, which is in line with the above view of CSO and IMF.

However, the government has set the target of nominal GDP growth of 10% for the financial year 2021, in the budget. Along with the aspirational goal, the government’s move to limit the fiscal slippage to a mere 0.5% may not give enough impetus to reach the set targets, and hence the monetary measure may become necessary.

In the wake of the above, it is expected RBI to keep the repo, reverse repo, and bank rates under the liquidity adjustment facility at the current level and give an accommodative stance for way forward as long as it is needed to spurt the economic growth along with keeping inflation within target.

There has been a rate cut to the extent of 135 bps during February-October 2019, the monetary transmission across fixed income securities especially, short-term markets such as call money market and CPs of NBFC has been swift. However, the said transmission has not been reached fully to end consumers, and therefore, the direction in this respect to commercial banks is a need of an hour. Hence, a regime indicating that the initial rate cuts are done in Apr-Dec 2019 are passed down to the end consumers or industry, in the most efficient manner, will be cheerful.

Monetary policy is a prerequisite to having sustainable economic growth and price stability. High inflation is detrimental to long-run economic performance and prosperity. If the banks ease lending, in turn, it enables the business and households to boost spending. Stocks will become an attractive option to invest in a low interest-rate regime nurturing households’ financial assets that contribute to increasing consumer spending. Low-interest rates also tend to cause currency depreciation since the demand for domestic goods rises when imported goods become more expensive. All these factors tend to raise output, employment, investment, and consumer spending.

4. E. Bijoykumar Singh, Professor Manipur University

The northeast is back to square one. The euphoric sense of something big coming up in the region has been aborted by the deafening din of the tumultuous events in India in the last few months which have revived the balkanization movement in the region. What we see playing out in the region gradually is also a massive diversion from relevant issues to seemingly relevant intractable issue of outsider vs insider. Every attempt is being made to activate every fault line in the region- undoing what has been developed in the last few decades for the sake of next five years. The unfolding events seem to have undone the united NER movement ushered in by the compulsions of Act East Policy. The realization has been dawning on us that a united NER is the only way of internalizing the gains of the policy. This realization has been challenged and the talks with various armed groups in the region all point to the possibility of further balkanization of the region. Territorial integrity is going to be compromised time and again in search of the elusive peace in the region. The tragedy is that this search has always depended on a partial and elitist understanding of the pathos of the region. Now every state is on its own with the dream of a region severely challenged. Mutual trust so assiduously built up over decades seems to have vanished. We worry about the future of the renaissance of the region. Was there really a renaissance in the region ? The debate has been skillfully diverted.

Assam’s experiment of NRC aroused lots of hope in the region with every state talking about a repeat in every other state. The fear of becoming a marginalised group in our land has always been with every generation in this region. Census after census only showed the changing demographic scenario endorsing in the process, this belief of marginalization, however unrealistic it may be. Though the inner line permit system has been operational for decades in Arunachal Pradesh, Mizoram and Nagaland, it seems to have failed miserably. Yet it has been extended to Manipur which led to the petering out of the massive anti CAA protests in the state. Meghalaya is likely to get it in the near future. The people in the region have been told repeatedly that the region will be protected at any cost and exemptions to CAA made it almost Assam centric. The irony of the coexistence of a government with a huge mandate and a highly unpopular act cannot be missed. How has the link weakened in such a short time. However it is pertinent to point out the difference between the NER perspective and the mainland perspective. The former is against every illegal immigrant irrespective of caste and creed and place of origin. The latter is against the exclusion based on religion and place of religion. One is for exclusion and the other is for inclusion. One is coming from 4% of Indians and the other from 96% of the Indians. It indicates the failure of the policy makers to account for every opinion. One has to understand why the NER has become so hostile to immigrants despite the fact that the history of the region is largely a history of migration. We have been very inadequate in allaying the fear lurking in the mind of the people for decades.

The budget has shied away from making any commitment for the North east. The foundations of Act East policy cannot rest on assurances only. Availability of cheap bank credit with the usual safety measures will play a significant role in concretising the Act East policy. Such opportunities do not come often. It will be a tragedy if we donot avail of this opportunity. This should not be assessed in terms of economics alone. The huge flow of intangibles in the form of change in mindset should not be ignored. Cheaper bank credit and higher growth of money supply need not be feared when the inflation rate is also quite low. That calls for a lower interest rate regime.