Patel signals end of Rajan era
Reserve Bank of India (RBI) Governor Urjit Patel, on Tuesday, signalled a marked departure in policy approach from his predecessor’s unwavering focus on price stability.
While the cornerstone of Dr. Raghuram Rajan’s approach to policy making was centred around his view that low and stable inflation is a prerequisite for sustainable growth, economists expect the RBI under Dr. Patel will prioritise the provision of monetary stimulus to bolster the still fragile economic momentum, even as it aims to keep retail inflation within a broad zone stipulated in the monetary policy framework rather than targeting a specific point.
‘Tweaking framework’
In a report titled “India: New RBI dilutes old RBI framework”, Nomura economists Sonal Verma and Neha Saraf argued that the central bank’s rate cut had been justified by tweaking the inflation framework. The RBI had on Tuesday reduced the repo rate 25 basis points to 6.25 per cent, its lowest level since 2011.
“The rate cut was justified not on the basis of an inflation undershoot (the RBI still sees March 2017 inflation at 5 per cent with upside risks), but by tweaking the framework,” Verma and Saraf wrote. “In fact, our main takeaway from Tuesday’s policy meeting is that there has been a dilution of the tenets of the flexible inflation targeting framework under the new RBI (Dr. Patel) compared with the old RBI (Dr. Rajan),” they wrote.
During the post-policy briefing, Dr. Patel indicated that following the amendment to the RBI Act and associated notifications, the central bank’s mandate now was to maintain retail inflation between 2 per cent and 6 per cent.
“Under the old regime, the RBI was clear about lowering inflation to 4 per cent by March 2018,” the Nomura economists observed. “Now, the interpretation of the inflation mandate appears to be to keep inflation within a range of 4 per cent (+/-2 per cent) over the next five years, which is too wide a range without a specific time commitment to the midpoint,” they contended.
Economists also noted the change in the RBI’s stance on the real neutral rate of interest. While Dr. Rajan had talked about the neutral rate needing to be in a 1.5-2 per cent range, RBI Executive Director M.D. Patra on Tuesday said the real neutral rate would be 1.25 per cent, with scope for going lower given the global trend in interest rates.
“A noteworthy development on Tuesday was a change in where RBI sees current real interest rates,” HSBC economists Pranjul Bhandari and Dhiraj Nim wrote in a research note. “Given India’s partly open capital account, global rates are an important driver of domestic rates and may have pushed India’s domestic neutral real interest rates lower, to the 1.25-1.5 per cent range,” Bhandari and Nim observed.
The developments suggest that growth is a higher priority for the new governor. Dr. Patel’s emphasis on reviving economic growth during his interaction with the media was also cited by economists.
‘Dovish’ departures
According to Samiran Chakraborty, chief economist, Citi India, one of the ‘dovish’ departures from earlier policies was the repeated emphasis on the “growth objective” in the RBI’s communication.
“The growth outlook and the “neutral” liquidity stance are similar to earlier policy,” Mr. Chakraborty said. “The departures do open up scope for more easing, in our view.”
Source: The Hindu
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