RBI policy stance has turned de facto neutral: Pranjul Bhandari, HSBC
In FY20, BoP deficit may not be as wide if oil averages $65-70 a barrel, says HSBC chief India economist
How do you read the recent policy where MPC has lowered inflation forecasts and maintained growth expectations?
Well, there was something for everybody. For the optimists, the RBI slashed inflation forecasts. It spoke about how it will continue with heightened open market operations (bond purchases) till March. They also spoke about more space opening later if upside risks did not materialise. Cautious people also had something. They highlighted the fact that core inflation is very high, there are a lot of heightened risks which are still on the horizon. For instance, the possibility of a fiscal slippage, reversals in oil prices and so on. There was something for everybody. Reading between the lines, there was a very strong element that the stance was already de facto neutral. We are hoping that by the time it’s February and some of the fiscal uncertainties are known and if the government is able to keep its fiscal deficit target, then officially the RBI can make its stance neutral.
Liquidity is still a concern. Do you need more tools to manage liquidity?
At this point, it is not a question of tools, it is just a question of the quantum of OMOs or the liquidity infusion that they are able to do. Right now, they have two ways that they can do it — through OMO purchases and by buying dollars. Through these tools, it can infuse required liquidity. The fact that the deputy governor said that they will continue to do it at heightened pace until March, it seems to me that these concerns over the next couple of months will abate. I think there will be enough liquidity infusion that will be needed.
How will the SLR cut help in addressing system level liquidity?
It has a specific reason because from January 1st, banks will have to meet 100% LCR (liquidity coverage ratio) requirement. It also includes government bonds. Suddenly that increases and through that the demand for government of India bond also increases. So to compensate, they had to reduce SLR. SLR is now being adjusted for the high LCR requirement. That is why it did not have much impact on the markets. Also, investments in government bonds right now is also very high. So that is why I think it will have more impact on system level liquidity.
Given the level of the rupee, how much dollar purchase would be possible?
Let me tie it down to the balance of payment deficit. For this financial year, the balance of payment deficit — current account plus capital account — is between $25 billion and $30 billion, according to our forecasts and that is why we have seen the rupee depreciate 10% to the dollar year to date. But going forward, in the next financial year, we do not think that the BoP deficit would be as wide if oil averages in the $65-70 a barrel range. And at that level, we think that the BoP deficit will be almost fully gone. We will be close to a surplus. In that sense, we do not see too much of an incremental pressure on rupee depreciation in the next couple of months.
Given our consumption-led growth and slowing of household financial savings, aren’t there concerns about funding the CAD?
One nice way to track that is to keep an eye on CAD and also on CAD excluding oil. That is the deficit which gives us a good sense of the pressure we are facing. That balance is still pretty high. It is not doing too well. Between FY14 and FY18, India’s core exports fell by 4% of GDP. We do have a lot of underlying problems with the fact that our exports are not very competitive. The fact is that we are importing far more electronics than we were doing in the past. Slowly some of our investment needs, for instance, coal imports have been rising. The only point here is that oil is such a big player that when oil prices fall, it masks a lot of other vulnerabilities, which I suspect will be the case for the next couple of quarters. Our medium-term challenge is to raise our savings rate because we do not want to reduce our investment rate. We have got to raise our investment rate. So, the only way we can keep our current account under check is to raise our savings rate.
How can that happen?
The number one player there has to be the government, because the Government of India has been dis-saving by running a fiscal deficit year after year. Both the Centre and the states combined are actually taking away space from what the private sector should be able to import. So, we really need our fiscal balances to come as close as possible to neutral, so that the government’s dis-savings actually fall. That will be important to keep our BoP under check over the medium term. The other way of saying the same thing is that it should reduce its fiscal deficit.
How do you see oil prices moving?
It is very difficult to get a sense. There are so many moving paths. We follow the forwards curve. We are working with a $65-70 a barrel assumption for the next year for now.
What is the fallout of such a huge movement in a very short time on policy making?
Just two months ago, the biggest problem in everybody’s mind was the dramatic slide in the rupee, which has obviously got stemmed now. In fact, the rupee has appreciated a bit. So, it has been very dramatic because oil prices have fallen suddenly. So that is the first implication. I think oil prices, of all the macro variables, impact the external balances the most. So we have already seen that improvement. But I think over the next couple of months, while it will take off any external pressure on inflation, it will also take away some pressure on fiscal balances as well. On the margin, it will be positive for growth because your input prices are falling. It helps corporates. It also helps households by increasing purchasing power and so on.