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Better to front load a rate cut than to wait for monsoon progress: SK Ghosh, SBI

Growth is need of the hour now and it can be done through monetary policy, says Ghosh

ET Now|
Apr 15, 2019, 04.25 PM IST
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There is a greater possibility of supporting growth through monetary policy actions rather than fiscal policy actions, said SK Ghosh, Group Chief Economic Adviser, SBI, in an interview with ETNOW.

Edited excerpts:


The RBI governor proposed rather a big shift when it comes to the rate moves, saying that the tranches of the 25 bps cuts or raises do not need to be sacrosanct. Could this be some sort of a hint on what may come in the upcoming policy?

Rate cuts of 25 bps is mostly a developing market construct. The Central Bank of China actually used to do rate cuts in lower multiples, lower than 25 bps earlier. But the larger message which the governor is trying to give out is that it could be 10 or 15 or more than 25 bps to indicate a change in stance.

For the last couple of months, there has been a lot of discussion on the stance. We have moved from neutral to calibrated tightening to neutral. The market is a little bit confused what could be the possible direction and maybe to give a direction to that, has been governor’s underlying plan. Actually, it is an interesting point and we can debate on that. But generally, it was the trend in some of the countries earlier. It is a DM concept and there is no harm if you want to change that concept.

What are the likely implications if RBI was to resort to that? What are the risks that we see in implementing a flexible rate policy? What could be the likely implications?

I will just give you a historical context. The context is basically that central banks now have become more transparent in their communication and that also speaks a lot about the central bank independence. The entire logic of whether they need to cut it by 10 or 15 bps or if they want to cut it by more than 25 bps, to me what is more important is the communication to the market.

For example, the Fed communication to the market has significantly evolved over the years as does the RBI. For example, if I take the example from RBI, from 2010, RBI decided to give out this bimonthly reviews. That was one thing. The Fed, at some point of time in 2013 after the crisis, actually moved over from one generation, which means that typically not specifying the debt, rates could be on hold for an extended period.

The rates could be on hold say till March 2013 or March 2017. RBI currently gives out forward guidance. The statement does not say much about how long the rates will be on hold or could increase and my sense is that through this communication which the governor has given out in the policy two days back, he is trying to imbibe a sense of communicating with the market, a proper sense that when the rates are going to increase or decrease, it could be in the form of a language and in form of rate change but at the end of the day, this is more of a communication with the market rather than the number itself.

You touched upon overall growth comparison with China, but do you think that it is the need of the hour for India as well to shift their focus to high growth rates like that of China? Going forward, there would need to be more policies as well to help spur investment.

I agree with your point. Growth is need of the hour now. We are looking into all the leading entities very closely and the most important thing is the percentage of leading indicators is showing an expansion of around 40 to 50 leading indicators. The percentage now is less than 40%.

That means on an average the indicators are showing a distinct slowdown and given the fact that global economy is also undergoing headwinds, there is policy uncertainty in terms of fiscal policy because we do not have a space for fiscal.

Time has now come to support growth and possibly the monetary policy could do that. There has been several indications in the RBI policy document in terms of how it can support growth. The number of times the word growth which has been used in the last two policies has been significant. If I take all these factors into account, there is possibility of supporting growth more through monetary policy actions rather than through fiscal policy actions on which the scope is limited.

The latest macro data sets a case for perhaps further accommodative stance from RBI. Do you feel perhaps another rate cut is coming in sooner? Markets have already been expecting it but what is your anticipation going forward?

We have been saying that possibly a rate cut could happen in June because the fiscal policy, the budget will be in July end and I am not expecting too much from the budget. The fiscal deficit which has been kept at 3.3% now, has been moved to 3.4%. I do not see significant amount of downside to the 3.4% in the next fiscal year. It is better to front load the rate cut than to wait for the monsoon progress and the budget progress. In August, anyway you may not have an opportunity to front load the rate cut.

My sense is that cut the rate, front load the rate cut and if the RBI or the governor has to be believed, we need to debate how this is going to be communicated to the market whether in terms of an increment of 25 bps or not.

A taskforce has been set up by RBI to study the offshore rupee market that in the past has proved to be a bit troublesome for the currency markets in India. What is your assessment of the rupee?

Very honestly, the rupee move has actually puzzled the market. After the swap was announced, the rupee appreciated significantly. The rupee has actually been showing a declining trend because of the adverse news on the capital inflows front. My view is that the rupee is likely to remain range-bound till elections, maybe around 68.5 to 70 and after elections, we may see some sort of movement in the rupee value. Perhaps, the rupee could depreciate a little bit after elections, taking into factor all the news.
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