"If the current inflation momentum and changes in inflationary expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year."
Despite the absence of a rate cut, the policy has cheered markets because of the promise of a strong signal in future coupled with a statement that RBI is working towards growth that can be sustained over years. Also positive was the central bank's observation that the government was in agreement with RBI to set a medium-term inflation target.
When will RBI cut rates?
If the current inflation momentum and changes in inflationary expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle. We have had a couple of months (of low inflation) after 4-5 years of high inflation, we have to make sure that this is for real, especially because we do not want to flip flop. If the world changes dramatically or circumstances change dramatically we will have to respond. But we certainly do not want to follow every piece of information up and down. We want to change and we want to change for good.
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How positively can we view 'early next year' statement?
You can interpret it as positively as you need to. That depends on your frame of mind. The thinking behind this is that we are definitely seeing a disinflationary process and of course crude oil, etc have been positive. We want to get more certainty about the pace of the disinflationary process as well as developments on the fiscal front. We think that we are well set at this point, but as information comes in, our sense is that policy will move toward monetary accommodation. The stronger the information, the sooner will be the accommodation.
Why has RBI left rates unchanged even as interest rates have fallen?
There is still some uncertainty about the evolution of base effects in inflation, the strength of the on-going disinflationary impulses, the pace of change of the public's inflationary expectations, as well as the success of the government's efforts to hit deficit targets. A change in the monetary policy stance at the current juncture is premature.
Whether RBI is concerned about government meeting fiscal deficit target?
I would use the word uncertainty. The pace of revenue inflows, etc depend on growth which itself is an uncertain element right now. I would reiterate that the government has told us quite strongly that they are determined to stick to the targets and that's what we have said on the policy. The fiscal numbers are one of the numbers that we have enumerated that we would like to have more information. Obviously we would like to see a good budget going forward. Our discussion with the government suggests that things will be on track.
Why RBI is unresponsive to plight of corporates?
There is a misconception in corporate India that the central bank is not concerned about growth. Today there is a big fight between savers and producers. Savers are saying there is high inflation and don't want to save in financial assets. Producers are seeing low inflation and saying 'Oh my god! Interest rates are so high. How can I invest? We can bring the two together only by bringing inflation down. We are not talking about quarters; we are talking about years of sustained growth. In order to get that you have to fight inflation beat it and then you can get the sustainable growth. Today's monetary policy will not impact growth this quarter. It has long lags and it is only three to four quarters down the line you will see will see the consequences.
Why are lending rates for corporates not coming down?
I see a whole lot of confusion on what rates RBI is responsible for and what for what rates corporate India is responsible for. The immense risk premium that is asked from certain corporates is because of the state of their leverage, because of the risks they have taken and because of their inability or unwillingness to repay. It should not be attributed to RBI. What we control is the risk free rate, what they control is the risk premium over that. They should work on bringing the risk premium down and we will work on bringing down inflation. Also since July, long-term bonds yields have come down by 60-70 basis points which reflects a fall in the borrowing rate. Short-term rates have come down because we have managed liquidity. Those are positives for corporate India. When monetary policy turns hopefully it will turn broadly in financial market which determine the rates they pay.
Will RBI ask banks to pass on fall in money market rates to borrowers?
It is not my place to tell banks what to do. The transmission process is still not working as significantly and therefore one would imagine that if past falls have not been passed through there is only a mild chance that an additional cut would.
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