RBI hints stance still dovish, says recovery is fragile

After warning several times that India could be among the first to withdraw monetary policy accommodation, Reserve Bank of India governor D Subbarao on Friday said he now didn’t want the country to be an “outlier”.

Subbarao said the recovery was still fragile and growth impulses needed to be nurtured.
Addressing students and faculty of the Indian School of Business, Subbarao suggested going behind the good growth numbers, as sometimes growth is witnessed just because companies are building inventories.

His deputy, Shyamala Gopinath too echoed this sentiment, when she said in Ahmedabad that while economic recovery is there, it has to be ‘assured’.  Subbarao said had India increased rates in October, it would have attracted huge capital inflows. Capital inflows that are in excess of current account deficit, or over 2% of GDP, could have been a cause of worry, he said.

In fact, the hot money that went into Brazil will change course towards India, he said.  Subbarao recounted the troubles India faced in 2007-08 when capital inflows far exceeded the country’s current account deficit. “India at the moment is in the ideal situation, the capital flows are roughly in line with its current account deficit,” he said. India expects the year’s current account deficit to be around 2% of GDP.

“What are our options if capital flows come in? If RBI doesn’t intervene in the forex market, then what that does is appreciate the rupee. What is the consequence of appreciation of rupee? Our competitiveness goes down,” he said. And the likely move of the RBI to defend the rupee’s appreciation will get more inflows into the country.

“There are no benign options. Challenge is to minimise cost not at a point of time but over time,” he said.  Subbarao said inflationary pressures were building up. Though the wholesale price index (WPI) inflation is at 1.3% and is further coming down, inflation as per the four consumer price indices (CPI) is still in double digits.

Yet another negative factor is the decline in kharif crop by about 18%. Exports declined for one full year in a row and there is a deceleration in non-food credit at about 4.4%. “Normally, the non-food credit should be at about 18-20%,” Subbarao said.

“The indices are certainly improving. But, the challenge is in maintaining the improvement,” he said. While talking about the RBI’s exit strategy, he said, it is a question of determining the timing and sequencing. “We need to withdraw monetary accommodation and wind up all unconventional measures we had put into the system during the time of crisis,” he said.

Subbarao said the RBI had responded during the times of crisis by brining in conventional and unconventional measures into play.  Conventional measures included reduction in policy rates, cash reserve ratio, relaxation in norms for external borrowings and raising interest rates ceilings for NRI deposits, while unconventional measures included the rupee-dollar swap facility for the banks and refinance window for specific sectors.

However, Subbarao said that certain measures initiated by the government to benefit the rural areas in the country came in handy for the economy to weather the impact of recession. While saying that the concern was about growth holding up after the withdrawal of stimulus, he said rural consumption held up during the crisis.

“There are different schemes that were brought into the rural economy like the NREGP, which ensured that there was money available with households. The farm credit waiver too helped the rural economy. There was no wealth loss effect in rural areas though there was some such effect in the rural India. Though as a coincidence, these measures helped in rural consumption holding up in crisis,” he explained.

While saying that the government should return to fiscal consolidation, he said that there was a temptation to spend more and that would remain a big challenge.

T Bijoy Idicheriah and Narayana Krishna of NW18 contributed to this story