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We are trying to get a finer grip as to what is happening in economy: RBI

Slowdown in GDP due to deceleration in capital formation in Q4, says the central bank

BS Reporter 

After the Reserve Bank of India’s (RBI’s) second bi-monthly policy review for FY18, Governor Urjit Patel and other top officials spoke to the media on the central bank’s decision to hold the repo rate, reduction in SLR requirements, inflation and its fears about the rising loan waiver demand. Edited excerpts: Recently, the media reported that the finance ministry had called for a meeting with the Monetary Policy Committee (MPC) members. Does it not curb the RBI’s independence and damage the credibility of the MPC? Urjit Patel: The meeting did not take place. All the MPC members declined the request of the finance ministry for the meeting. After Uttar Pradesh, the loan waiver demand has gained momentum in Maharashtra and Madhya Pradesh. What will be its impact on the financial status of the states? Patel: Unless there is an existing fiscal space in state government budgets or some space is found, the likelihood of going down this slippery path and dissipating the important gains that we have made in fiscal rectitude over the last two-three years can come undone. Past episodes in our country have shown that when there are significant fiscal slippages, they do permeate through to inflation sooner or later. It’s a path that we need to track very carefully before it gets out of hand. The pronounced slowdown in Gross Domestic Product (GDP) growth in Q4 of FY17 in the Central Statistical Office’s (CSO’s) new data has been partly attributed to demonetisation. What is your view? Patel: The new data released by the CSO needs to be examined carefully before reaching any conclusions. This data incorporates new indices of industrial production and wholesale prices. The latter is used as a deflator and in that sense, presents a better picture of the economy than the old series. That data show that the slowdown in the economic activity set in during the first quarter of FY17, well ahead of demonetisation. The data also show that agriculture and mining, which are highly cash-intensive, are not affected by demonetisation. Rural wage growth has remained elevated especially compared to agricultural labour inflation. Manufacturing, as reflected in corporate sales growth in the Index of Industrial Production, electricity and other utilities, trade, hotels, transport and communication have been resilient in the second half of FY17. Construction and real estate have been affected, but in some way it was predictable since the attack on black money would almost by definition affect these sectors, given the circumstances under which they operate. Turning to GDP, private consumption actually accelerated in Q3 when demonetisation was most intense and remained resilient in Q4. The slowdown in GDP is mainly due to deceleration in gross fixed capital formation during Q1-Q3, and then a contraction in Q4. This suggests that there are more fundamental factors at work that public policy should address urgently to reignite the animal spirits and reinvigorate entrepreneurship and business activism. On the inflation front, are you being over-cautious or are you preparing ground for monetary easing in August? Michael D Patra: The inflation outcome reflects a combination of factors which are very difficult to disentangle at this point with only one data point.

The MPC took a conscious view that we would look at more data because what we are seeing currently is that there are these transitory factors like sale of perishables. Since July, supply side factors have come into play, especially pulses, cereals and vegetables, which could be longer-lasting than these transient factors. We need to unravel these effects, and then take policy actions. Spending will depend on the pace of remonetisation. Could you tell us as to what extent remonetisation has happened as data are not available? B P Kanungo: The data of remonetisation are in the public domain. At present, 82.6% of the economy has been remonetised and in volume terms, it is 108% of the figure as on November 8. So, there is no shortage of cash. There could be shortage of cash in some pockets but whenever such things come to our notice, we respond immediately by inter-chest remittances and several measures have been taken in this regard. What will be the conditions that will bring forth a rate cut? Acharya: We have revised our inflation projection down. But if our second half projections are looked at, we are still in the 3.5-4.5% range. So, we need to see more data and gauge whether the inflation remains within the medium-term projections or whether it is a surprise, even relative to this revised projection. We have a combination, a big surprise in the inflation number, as well as the CSO (Central Statistics Office) revisions. We are just trying to get a finer grip as to what is happening in the economy in the next few months. The internal committee is due to meet and the oversight committee is in place. What is the composition of this committee? Particularly, the internal advisory committee; are there going to be RBI members? Patel: The committee will comprise majorly of independent board directors. The oversight committee is already in place. It’s just that more members are going to be added. The five-to-one vote, does it reflect not just differing views but maturity on the part of the MPC? Also, can you throw some light on the Statutory Liquidity Ratio (SLR) and Held-to-Maturity (HTM) calendar? N S Vishwanathan: On the HTM part, the banks have to have only 25% of the investment portfolio as HTM. But we had allowed them an extension beyond 25%, provided the entire excess is in count of the SLR maintained. When we have brought down the SLR, we also brought that percentage down. This time we have taken a view that it is not necessary to bring down the HTM. Patel: On the configuration of the MPC vote, it suggests that wait-and-watch approach has been taken and the diversity of the views that are in MPC constitution has meant that we did have a vote that was not unanimous.

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First Published: Wed, June 07 2017. 23:03 IST