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RBI policy: Central bank needs to take measures to support liquidity, says SK Ghosh, SBI

“Agricultural sector is showing signs of distress while the industry and service sectors have been peaking up.”

ET Now|
Jun 06, 2018, 05.45 PM IST
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If the RBI stays on course, there could be at best another rate hike but it is not the beginning of a series of rate hikes, SK Ghosh, Group Chief Economic Adviser, SBI, tell ET Now.

Edited excerpts:

While keeping the stance neutral, RBI hasn’t talked much about liquidity. They have said that they are going to manage liquidity in a very durable way but they have not really identified the instruments for doing so. What is your view?

I agree with you. RBI has already said that it will continue to move in the narrow cord in the corridor of what the RBI wants. Even though the rate hike was a very close call, the liquidity issue needs to be sorted out because otherwise the market is working with the double whammy of a rate hike and inadequate liquidity which may not be supportive of growth.

At the press conference, the RBI governor actually emphasised that the currency in circulation is higher than the trend growth rate and also there was also some talk on how the liquidity situation could span out in the current year. Some measures by the central bank are needed to support liquidity during the financial year. Otherwise, the financial stability path or the yields of the government securities are likely to show an upward trend in the coming days. There are also other measures like the valuations measures which could have an upward impact on the banks on the yield movement in the G-sec market.

Given the fact that you had argued for no rate hike and you wanted RBI to check the overheated Indian economy, are you disappointed that there has been a rate hike?

Yes. In fact, at 7.7%, the GDP numbers show that the economy is growing well but perhaps beneath the GDP numbers there are couple of things which are still to be taken care of. There is now a clear distinction between India and Bharat. If you look into agriculture and industry, nominal GVA is expanding more than 8%, while nominal GVA in agriculture is expanding at less than 4%. There is a clear distinction that the agricultural sector is really showing signs of distress while the industry and service sectors have been peaking up.

We need to be mindful and cognisant of this deviation between the India and Bharat. Otherwise, the concerns with the RBI’s flack in terms of the oil price hike, in terms of the MSP are all warranted but the good thing is that even though it has hiked their rates, it has kept the stance neutral because there is every possibility that the oil prices after the OPEC meeting on June 22nd could actually see some rebound.

Also, there is no clear demarcation on how the MSP price hike is going to play out -- whether it will be a compensation scheme or a pure hike. Taking all that into consideration, I do not believe this is the start of a rate hike cycle.

The May and June inflation numbers could be a little bit unfavourable but the base effect can also be ascribed to that. In June, the core CPI could cross 6% but that also comes over a low base in June 2017. If the RBI stays on course, there could be at best another rate hike but it is not the beginning of a series of rate hikes. That is why it has kept the neutral stance open at this point of time.

What sort of an impact do you see this 25 bps rate hike will have on investment activity and credit offtake? Do you believe this is budgeted for and is not going to have either a sentimental or a real impact on investments or credit offtake?

Investment revival is a very important point which could indicate that there is some sort of an investment revival in the west. From that point of view, RBI may be correct in saying that growth has peaked up and investment revival is underway.

My sense is that the 25 bps rate hike, coupled with the neutral stance, seem to be okay for the market but there are some uncertainties over here. For example, in 2013, there were a series of rate hikes. RBI went for a 300 points increase in the rates. The rupee actually weakened. It could be a self-fulfilling prophecy that the market could actually want the RBI to raise rates more for more carry-forward returns so that the rupee shows some weakening.

I hope that the trend is reversed. If that is the case, if the macro parameters are not that favourable then I am not sure about the investment sentiment and the other thing which is I want to add over here is that I find a statement very surprising in the RBI document where it says that the rebound in growth this year was primarily because of a revised private final consumption expenditure. We all know that the private final consumption expenditure actually has weakened in FY18 over FY17.

I believe that even though investment revival is taking place, there is still some weak spots in terms of consumption sentiment, particularly in the rural sector, Until and unless that is not taken care in some sort of an MSP package, I do not see a sustained revival in the growth sentiments.

Perhaps, RBI now knows that there could be some sort of a fiscal pressure. We believe that the 3.3% fiscal deficit target may not be sacrosanct. That may be a pre-emptive way of saying that look if the fiscal deficit increases, we are ready to hike rates. That way the inflationary expectations are contained.


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The era of low crude oil prices is over: SK Ghosh, SBI

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