Sunil Subramaniam: We tend to look at RBI’s thing from a narrow perspective of inflation versus growth. But it’s important to bear in mind that RBI wears three hats. There’s a monetary policy hat, there is an interest rate hat which I slightly differentiate from the liquidity aspect, and then there is a currency management hat. Overlaying all of this is the fact that they are the manager of the government’s debt book. So, they have multiple things to cater to.
The second thing is that we tend to equate RBI policy to U.S. Fed policy. RBI as a central banker and the Fed as a central banker. We tend to think that the Fed’s actions should be mimicked by the RBI and we tend to wear the same lens.
But there are two vital differences. The first difference is that advanced countries are demand-led economies where rates and liquidity directly transmit to the retail consumer and cause inflation or bring down inflation directly, whereas India is a supply-driven economy. In a supply driven economy, interest rate policy has limited role to play because the supply can affect interest rates on the borrowing by corporates, but not so much by the consumer at the ground end, because anyway demand is also not the key.
So, the ability of interest rate policy to impact the GDP and inflation is one. The second thing is the quantum of imported inflation in a country like India, which again is outside the purview of an RBI policy. No amount of policy interaction or intervention can do anything about oil being imported, food being imported and the third and most important thing here is that the Fed doesn’t bother about currency. So, RBI has to keep an eye on managing volatility in the country. They don’t target a currency rate managing volatility.
So, if you look at it within the context of what the RBI did today was a very good policy, very pragmatic in the sense that they know that 50 bps frontloading of the hike–it’s actually a 90 bps hike if you take between the last policy and this. So, the frontloading basically is to give them the room to boost growth when the supply side eases. So that’s why they frontload and (are) not reacting. Why the Fed hesitates to frontload is that frontload directly hits demand growth, whereas in India, it doesn’t. So, there’s no downside to frontloading. It’s only a sentimental thing. It’s a visual thing that I am frontloading a hike.
But at the ground level, if housing loan rates go up by 1%–from the average at 6.5% levels they were pre these hikes–to 7.5%. What is the impact on the EMI for a customer? It’s probably Rs 100-200 per month on a 25-30 year loan. So, the RBI policy has more of a signaling effect, rather than an actual reality, ground-level effect.
And by signaling an early frontloading, and perhaps another 40-50 basis points hike also because they projected inflation at 6.7%, which is way above their thing, but they left a small window for the last quarter of the year where they showed it coming below 6%.
So, there is a hint in the policy that if the monsoon is normal, and we see food inflation–which is 45% of our CPI basket–coming down, then RBI retains the desire to retain rates there or maybe even cut rates to support growth in the last quarter of the year. It is hidden within the language. But the way I see it is that’s why he broke up the four quarters.
To me, it is very pragmatic in a country like India to frontload because the Fed frontloads; it is hurting where it hurts the most, hitting almost below the belt because directly consumers get affected.
So, RBI laid off on the liquidity front. They talked about reducing accommodation over a multi-year timeframe. So, liquidity is also something that RBI eschewed a strong action today.