RBI finally realises it is bigger than its policy rate-setting committee
The job of a central bank is bigger than chasing one macro-economic target. The Reserve Bank of India (RBI) seems to have finally come to realise this.
“The MPC (monetary policy committee) may have been discounted, but do not discount the RBI,” said governor Shaktikanta Das in a press briefing after the policy statement on Thursday.
The RBI is bound by law to keep headline inflation in the band of 2-6%, failing which it would be asked to explain itself to elected lawmakers of India.
Inflation shot past this target in December. To that extent, its six-member committee has been careful not to be too accommodative to growth concerns. But nothing stopped Das from using other measures to soften the blow of an absent rate cut on an economy struggling to recover its mojo back. And that is exactly what the RBI did today.
The MPC’s statement was by the book, expressing enough concerns over retail inflation while at the same time keeping growth in its vision. But if the market wanted to know whether Das was growth focused, all they had to do was look beyond the committee’s statement.
Much of the firepower to untwist the mangled credit flow to the real sector was outside the ambit of the MPC.
The RBI made it easier and worth the while of banks to increase lending to housing, auto and small businesses by reducing cost through a waive off on cash reserve ratio. CRR is a regulatory tax wherein banks have to set aside a portion of their deposits with the central bank. Now if they lend to housing or small businesses, they don’t have to do it to the extent of their loans to these.
What’s more, the central bank has guaranteed long term liquidity of up to ₹1 trillion at a cheap price through long term repos of one-year and three-year to banks.
It gets better.
Now banks cannot park their idle money with the central bank as one-day operations are now withdrawn. This means lenders will double up efforts to lend or worse, park money in government bonds rather than face a negative return on capital.
The liquidity measures are reminiscent of the European Central Bank’s unequivocal promise of funds to the banking system. “The Reserve Bank will ensure adequate provision/absorption of liquidity as warranted by underlying and evolving market conditions - unrestricted by quantitative ceilings - at or around the policy rate,” the central bank said.
The markets are loving the assurances on liquidity. Bond yields dropped across the curve after Das made his liquidity promise. Also, long term repos do not replace bond purchases under open market operations, clarified deputy governor Michael Patra. For the bond market, this is akin to having the cake and eating it too.
As for the MPC, the committee made all the right noises on inflation and growth. It noted the recent rise in inflation and the prospects of it coming down. Das stressed that inflation may have peaked in the current quarter. Even so, the RBI raised its inflation forecast to 5.0-5.4% from 3.8-4.0 for the first half of FY21. While this may look like there is no more room to cut rates, Das was quick to soften the blow. He stressed that there is room for more policy action given the slack in the economy.
As policies go, today’s statement was dovish, with enough sprinklings of the vigil on inflation. The optics of retail inflation may have tied the MPC’s hands but the RBI showed it has one to spare for growth.