Shah further quotes an old Hindi film song parde mein rehne do parda na uthao, parda uth gaya to.bhed khul jayega (Let something be behind curtains) regarding RBI inflation targets. He says central bank governors do not like to show all their cards. This kind of parde mein between 4% plus or minus 2% gives RBI ability to juggle multiple balls from growth to foreign exchange to government’s borrowing programme.
What is your first view on the RBI’s monetary policy?
Your question is like asking a commentator where will Sachin Tendulkar hit the ball on a slightly tricky pitch? This RBI had the luxury of either pausing or hiking and they have taken a call to pause, which was least unexpected by the market.
My feeling is that in terms of GDP growth projection, the market is a little below RBI and in terms of inflation, the market is a little ahead of RBI. So RBI will watch data and developments and then take a final call.
I think it is like playing the ball on its merit and RBI has all the luxury. We just hope and pray that they get the maximum run in the match over inflation as well as growth..
Given the fact that the average inflation for the first two months of this quarter is already 6.4%, are we likely even remotely to get to that 5.1% for the quarter as a whole?
As I mentioned, the market is expecting inflation to be a little ahead of RBI’s projection but there is a positive base effect coming in. If we do not get a bad monsoon which is expected then inflation will remain under control. For us also, another watch is oil price movement.
Earlier, oil price used to move based on demand and supply. Now it is moving more on the basis of OPEC’s cartelisation. So oil and monsoon continue to pose a risk on inflation on the higher side than expected, but let us hope and pray that we will be lucky. One more point, when money comes into mutual funds, there is a higher multiplier effect because we put our money in bank accounts. There is no leakage in terms of SLR, CRR. When money comes into banking systems, there is a leakage in terms of CRR, there is a deferment in terms of SLR or credit outflow or credit deposit ratio and overall money multiplier may get impacted. I fully agree that there should be a level playing field. But banks were at a much higher risk from insurance companies than mutual funds. Debt mutual funds as a percentage of bank deposits have declined over the last 10 years and my fear is that the money multiplier and money supply growth will get adversely impacted because of this exemption taken away.
What is the RBI’s target? Is it 6%, is it 4%? What do you think the governor really meant when he said closer to the target?
There is that Hindi film song parda uth gaya to.bhed khul jayega (Let something be behind curtains). I think central bank governors are unlikely to show all their cards. This kind of parde mein between 4% plus or minus 2% gives RBI ability to juggle multiple balls from growth to foreign exchange to government’s borrowing program.
My feeling is that at this point of time with reasonable certainty on growth, RBI is probably focusing on one side core inflation which has proven a little bit sticky.
Second, they might be looking at inflationary expectations by anchoring inflation around 4% rather than the higher end of 6%. But at the same time, they would like the flexibility of tolerating slightly higher inflation above 4 in case it is needed to support growth.
