Little room for the RBI to cut rates: IDFC's Pan
, ET Bureau|
Updated: Oct 04, 2017, 09.08 PM IST
MUMBAI: Indranil Pan, chief economist at IDFC Bank, shared his views after the RBI policy announcement.
On the room for further rate-cuts
There was probably no room for the RBI to cut rates at all. The critical problem in front of the RBI is that, while growth is moving down, inflation is actually moving up. Technically, inflation should also have moved down for a central bank perspective.
The critical issue, therefore, is that if the growth has to be revived and inflation anchored at the 4% level, the remedy is unlikely to be monetary policy. It is more likely to be fiscal policy.
That if this slowdown has to be reversed it is more likely to be a directional long-term reforms-oriented shift of gear rather than anything else.
Is the low interest-rate cycle over?
From the RBI’s perspective, we are more toward the end of the cycle. Also, the global cycle is turning around and as an emerging market economy, we also follow the global cycle. Interest rate gaps determine how much (fund) flows come to us. Not only domestic inflation but also global cycle determines that we are close to the end of the cycle.
The overall general liquidity scenario has to be more coordinated with the general liquidity aspect.
On the fiscal push:
The critical point is that we still don't immediately know the extent of the fiscal push. Now, the only way we understand the fiscal push is more from a slippage on the revenue side rather than an enhancement of the expenditure side.
A slippage on the revenue side, while holding the expenditure line as is the current trend, is one kind of a fiscal push. The other kind of a fiscal push could be revenue slippages but also an increase on the expenditure side.
On inflation and House rent allowance (HRA)…
A certain segment of even government staff stays in rental flats but also enjoys HRA. So, the additional cash can have a second round pull in terms of higher consumption by these individuals and hence a higher inflation. So, it is the second round implication that is being looked at, rather than the first round. So, the second round implication has a bigger connotation in terms of inflation risk from the RBI perspective.
The government has removed the excise duty on motor fuels. The RBI’s turn now…
The RBI, which slashed rates by 200 basis points (over a period of time), did what it could for growth. The problem is that the real interest rate is looking very large now.
Another problem is that credit growth is not happening. It is not only because of methodological difficulties like MCLR but also linked to the fact that there are not many right creditworthy borrowers. There is no increase in credit growth even with further rate cuts.
On the room for further rate-cuts
There was probably no room for the RBI to cut rates at all. The critical problem in front of the RBI is that, while growth is moving down, inflation is actually moving up. Technically, inflation should also have moved down for a central bank perspective.
The critical issue, therefore, is that if the growth has to be revived and inflation anchored at the 4% level, the remedy is unlikely to be monetary policy. It is more likely to be fiscal policy.
That if this slowdown has to be reversed it is more likely to be a directional long-term reforms-oriented shift of gear rather than anything else.
Is the low interest-rate cycle over?
From the RBI’s perspective, we are more toward the end of the cycle. Also, the global cycle is turning around and as an emerging market economy, we also follow the global cycle. Interest rate gaps determine how much (fund) flows come to us. Not only domestic inflation but also global cycle determines that we are close to the end of the cycle.
The overall general liquidity scenario has to be more coordinated with the general liquidity aspect.
On the fiscal push:
The critical point is that we still don't immediately know the extent of the fiscal push. Now, the only way we understand the fiscal push is more from a slippage on the revenue side rather than an enhancement of the expenditure side.
A slippage on the revenue side, while holding the expenditure line as is the current trend, is one kind of a fiscal push. The other kind of a fiscal push could be revenue slippages but also an increase on the expenditure side.
On inflation and House rent allowance (HRA)…
A certain segment of even government staff stays in rental flats but also enjoys HRA. So, the additional cash can have a second round pull in terms of higher consumption by these individuals and hence a higher inflation. So, it is the second round implication that is being looked at, rather than the first round. So, the second round implication has a bigger connotation in terms of inflation risk from the RBI perspective.
The government has removed the excise duty on motor fuels. The RBI’s turn now…
The RBI, which slashed rates by 200 basis points (over a period of time), did what it could for growth. The problem is that the real interest rate is looking very large now.
Another problem is that credit growth is not happening. It is not only because of methodological difficulties like MCLR but also linked to the fact that there are not many right creditworthy borrowers. There is no increase in credit growth even with further rate cuts.
