RBI Monetary policy appears a status quo but there are complexities market should internalise: Abheek Barua

Abheek Barua, Chief Economist, HDFC Bank, says RBI Monetary Policy clearly revealed that it prefers reasonably tight liquidity conditions. And the temporary measure will perhaps now be replaced by a more permanent system of intervention to remove durable liquidity through reverse open market operations as the market calls it or more sales which is bond sales.

What stood out from the RBI commentary?
Well, clearly I think the markets were waiting for clarity on the liquidity sounds of the RBI and it clearly revealed its hand in the sense that it prefers reasonably tight liquidity conditions. And the temporary measure will perhaps now be replaced by a more permanent system of intervention to remove durable liquidity through reverse open market operations as the market calls it or more sales which is bond sales.

We have seen the 10-year bond deal go up. So in that sense it is still kind of hawkish and goes hand in hand with the repeated emphasis that the 4% number is the target and not the upper end of the band which technically the RBI has allowed. So higher for longer and, of course, I think you must recognise the fact that the policy statement began with a quote from the Arthashastra on financial stability, and it emphasised that inflation is very much a key component of financial stability, but there are issues other than inflation that need to be addressed given the global scenario and so forth.

RBI is now signalling that it is vigilant on the external environment and the impact on macro stability, and could use monetary policy instruments to counter some of the pressures that might emerge. So as he mentioned, although it appears a status quo policy, there are nuances and complexities within the policy that the market would do well to understand and internalise.

The entire issue of rural recovery has been eluding us for a long time now. The stock market goes ahead of itself and actually starts betting on such stocks, but it has not come by in a very meaningful manner so far. Today, Governor Das mentioned it once again. What are your thoughts on that part of our economy?
No, I think what he mentioned was that there is an incipient rural recovery, which wasn't there earlier. It is heartening to see that the rural sector is slowly coming back into play. But the problem is, of course, what will happen to the agricultural economy because of the uneven monsoons and so forth.

Things look a little better than what they did last month because, rains have picked up. But one has to look at it on a granular, disaggregated basis. You mentioned a number of crops which are going to be affected, particularly pulses. Geographies that are related to these pulses, large producers of these commodities, might see on the net aggregate demand slipping because of poor performance and other pockets which would continue to retain the momentum.

The rural sector picked up, Also given the various anecdotes and little bits of data that I pick up from banks, it seems that things are not going down, but are kind of flattening out after the recovery.