Shaktikanta Das felt economy needs more monetary stimulus: MPC minutes

When the MonetaryPolicy Committee (MPC) members met earlier this month they decided to keep the policy repo rate unchanged as they wanted to maximise the impact of any future rate cuts, show minutes of the meeting.
The MPC, which met on February 4 and announced its decision on February 6, focused on having banks pass on the past rate cuts and letting the economy show signs of improvement following the growth supportive measures of the government.

Unlike the previous policies, the six members of the MPC were not unduly alarmed on the inflation front, and took comfort in the fact that inflation expectations surveys showed the households expected moderation in prices. The members also deliberated on the coronavirus outbreak and its economic risks.
Even as the consumer price index inflation spiked to 7.35 per cent in December, much higher than Reserve Bank of India’s (RBI’s) comfort level of 6 per cent, it was largely because of onion prices rising 328 per cent, which alone accounted for a 210 basis-point (bp) increase in headline inflation despite its small weighting (0.64 per cent) in the overall bucket, the members noted. According to the RBI survey, “the three-month ahead inflation expectation is expected to moderate by 60 bps and one year by 70 bps”.
The members also noted that the growth-supportive measures by the government and the tax cuts would help the economy, but not in the short term.
Governor Shaktikanta Das said some green shoots were visible. “Monetary transmission and bank credit flows have improved, but they need to become stronger. While the macroeconomy needs further monetary stimulus, the inflation outlook continues to be uncertain,” said Das.
“Considering the overall evolving growth-inflation situation, it would be prudent to continue the focus on growth in the context of the expected moderation in inflation,” the RBI governor said, adding barring the intensification of global risks, there was policy space that needs to be timed optimally and opportunistically to maximise its impact on growth.
RBI’s executive director and newly inducted member in the MPC Janak Raj said the recent rise in food prices should boost rural incomes and help strengthen rural demand. While the stress in the automobile sector seems to be gradually receding, the real estate sector remains stressed.
If the coronavirus crisis prolongs and spreads, “it will have ramifications for the global economy and its net impact on the Indian economy might be negative even if oil and other global commodity prices decline”, Raj said.
“Weak demand conditions warrant further monetary policy easing, while elevated inflation and the highly uncertain inflation outlook call for a cautious approach. More data are needed for greater clarity,” Raj said.
Deputy Governor Michael Patra said there was no definitive evidence that the downturn is bottoming out.
“The endeavour now should be to improve transmission of the cumulative 135-bp rate reduction effected since February 2019,” Patra said.
According to external member Chetan Ghate, the September 2019 corporation tax cuts did not result into any discernible increase in net profits in the third quarter across several firm types in RBI’s Industrial Outlook Survey. The profit margin expectations for the fourth quarter also continued to remain pessimistic.

RBI policy: Monsoon and spending pattern hold key for economic revival

There has not been any surprise in the MonetaryPolicy Committee (MPC) action as the 7.4 per cent CPI inflation number for December provided little scope for going for a rate cut this time. The commentary of the Reserve Bank of India (RBI) is, however, important as it also takes into account the impact of the Union Budget while handing out the decision and here it is positive.
Inflation is likely to remain high in Q4 and the 6.5 per cent number provided is indicative of the fact that even in the next policy, it would be tough to cut rates as this number would be above 6 per cent. Combine this with the RBI projection of 4.5-5 per cent for H1, the feeling one gets is that inflation will prevail above the 4 per cent mark till September, 2020. A rate cut can still be done in case the MPC feels that growth is anaemic. Based on the RBI’s forecasts, inflation will moderate only in Q3 at 3.2 per cent. Here, too, the caveat of normal monsoon would hold.

While food inflation would moderate, the RBI has rightly pointed to the services segment which covers things like transport, telecom besides the higher customs rates pushing up consumer prices as being the risk factors. Even within food, the central bank has rightly noted that while vegetable prices would come down, the price of other products which are protein based have gone up, which can exert more continuous pressure on the inflation rate in the coming months. But non-food inflation will be something that will keep ticking in 2020-21.
On growth, the RBI is in line with the government as growth for next year has been placed at 6 per cent, which means that things will be better for sure relative to FY20, though the H2 will deliver higher growth compared with H1. Monsoon and spending patterns hold the clue for this to work out. Here, the RBI feels the government has done well for boosting consumption, which may not really work out as there is a divided view on this issue. However, their assumption is that the transmission of past cuts is working fine as seen in the weighted average lending rate (WALR) as well as the benchmarking of some retail and SME rates with approved securities. The assumption made is that the budgetary announcements on removal of exemptions will not counter some of these views. This has always been a worry when the Budget had announced the withdrawal of exemptions, especially housing and other savings in the alternative scheme propagated by the government.
The RBI has maintained an accommodative stance, which is good for the market as it rules out rate hikes which seemed possible at one time when inflation was going up (it probably will remain high for January, too). It has also indicated that there is room for further action, which means that during the year there will be some more rate cuts. More importantly, it is also asking for rates on small savings to be lowered as that would amplify the policy effects. The yield on the 10-year paper has come down marginally to 6.48 per cent from an opening of 6.50 per cent indicating a positive response from the market.
Madan Sabnavis is chief economist at CARE Ratings. Views are personal
Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.

World economy needs intellectual revolution to get out of low-growth trap

A decade ago, we thought the banking crisis was over and the expansion already visible in emerging economies would spread to the industrialized world. There’s been a recovery, but a frustratingly slow one. The International Monetary Fund just lowered its estimate of world growth both this year and next. Every data release seems to bring gloomy news. If the problem before the crisis was too much borrowing and too much spending, then the problem today is too much borrowing and too little spending.
The world economy is stuck in a low-growth trap. The question is why.

The Great Depression was followed by political upheaval and, in economics, an intellectual revolution. This time around, we’ve got the political turmoil but no comparable questioning of the ideas underpinning economic policy. That needs to change.
Modern policy makers operate in a world of radical uncertainty. They simply do not know what might happen next — and under these conditions, economic models need to be seen in a new light. The question isn’t whether the models are right or wrong, but whether they’re helpful or unhelpful. Today, the key features of standard models lead us astray in judging how to get the world economy out of its low-growth trap, and how to prepare for the next financial crisis.
Six years ago, Larry Summers reintroduced the concept of “secular stagnation” to economic debate. Conventional wisdom attributes this persistent slow growth — call it the Great Stagnation — largely to supply factors. This seems to fit because the underlying growth of productivity appears to have fallen. But the supply-side story is also suspiciously convenient, because the alternative — demand-led secular stagnation — sits uncomfortably with our prevailing model of monetary policy. This model finds it hard to accept that the investment required to stimulate production might be held back by extreme uncertainty. As a result, it accepts too readily that market economies are self-stabilizing.
Escaping from a low-growth trap sprung by radical uncertainty isn’t like climbing out of a Keynesian downturn, with temporary monetary or fiscal stimulus restoring demand to its trend path. It requires instead a reallocation of resources from one component of demand to another, from one economic sector to another, and from one company to another.
In some cases, the world has invested too much. China and Germany, for instance, have overinvested in manufacturing for export. Elsewhere, investment has been insufficient — in the infrastructure of many advanced economies, for example. Also, asset values in many places will need to be written down to more realistic levels, and some financial intermediaries will have to be recapitalized. These are structural weaknesses. Unless they’re attended to, there’s a risk of another financial crisis. The remedy isn’t monetary policy, but measures to support the needed reallocation of resources. Exchange rates, supply-side reforms and policies to correct unsustainable national saving rates need to be part of the mix.
Consider Europe. Further monetary easing and a weaker euro might help recovery in the south but would further distort the structure of economies in the north. Until France and Germany can resolve their differences over structural reforms to the monetary union, monetary stimulus on an even larger scale is not just papering over the cracks but also widening them. I am tempted to say that the best advice to the new president of the European Central Bank is to stay in Washington.
New thinking is also needed when it comes to dealing with financial crisis. The last one led to the Great Stagnation and was obviously costly in terms of lost output, but it was also expensive in financial terms. A recent IMF study found that the cost of interventions, including guarantees, to support financial institutions between 2007 and 2017 in 37 countries amounted to $3.5 trillion. Unprecedented injections of liquidity — the financial equivalent of overwhelming force — became a guiding principle of crisis management.
If potentially all debt issued by the financial sector must be guaranteed by the government in a crisis, the issue is not whether the Fed or other central banks would be able to provide such guarantees; it’s to devise a political settlement under which limits to private-sector maturity transformation are accepted in return. In effect, I am arguing for a tax on maturity transformation.
My book “The End of Alchemy” argued for a system of pre-positioned collateral related to the maturity transformation of the individual financial institution. Whatever the details, the imperative is to establish an ex ante framework for the provision of central bank liquidity. This is because it’s impossible to know when a small fire that should be allowed to burn and destroy one or more institutions might turn into a conflagration that threatens the entire system. Once a crisis has struck, it’s too late to create political legitimacy for the necessary emergency response.
Congress has curbed the ability of the Treasury and the Fed to fight the next crisis. This shouldn’t be surprising, because the actions taken during the crisis were not part of a system Congress agreed to beforehand. As former Fed and other officials have said, these restrictions are undesirable — but they’ll be removed only in the context of a clear ex ante framework that makes banks, and other maturity-transforming institutions, part of an insurance system that is accepted as fair. The political economy of “bailing out” banks would be much improved if it were clear that banks had subscribed in good times to an insurance system that entitled them to borrow in bad times.
In addition, radical uncertainty means that the liquidity of particular assets in some future crisis is unknown. This too argues for an insurance system — one that ensures that all runnable liabilities are covered — rather than on regulation to assure that liquidity is adequate. The response to the crisis combined excessively detailed regulation with a plea for greater freedoms for firefighters. This is ill-advised. Complex regulation imposes unnecessary costs of compliance and gives a false sense of security. And the absence of an agreed upon ex ante framework demands almost unlimited resources without the appropriate political authority.
The Fed and other central banks need to help legislators to see just how vulnerable financial systems will be in the event of a future crisis. Next time, Congress will be confronted with a choice between financial Armageddon and suspending the rules it introduced after the last crisis to limit the Fed’s ability to lend. Avoiding that choice demands radical new thinking about the lender of last resort — preferably before the last resort becomes a reality.

IMF backs India's corporation tax cut, says it will help revive investment

The International Monetary Fund on Friday supported India's recent decision to reduce corporate income tax, saying it has a positive impact on investment.
It, however, said India should address continued fiscal consolidation and secure long-term stability of the fiscal conditions.

"We believe India still has limited fiscal space so they have to be careful. We support their corporate income tax cut because it has a positive impact on investment," Changyong Rhee, Director, Asia and Pacific Department, IMF, told reporters at a news conference here.
Following a marked slowdown in the last two quarters in India, the economy is expected to grow at 6.1 per cent this fiscal year, picking up to 7.0 per cent in 2020, he said.
"The monetary policy stimulus and the announced corporate income tax cut are expected to help revive investment," said the top IMF official.
Anne-Marie Gulde-Wolf, Deputy Director, Asia and Pacific Department, IMF, said India should address the non-bank financial sector issues.
"While there have been improvements that have been put in motion, including efforts to recapitalise the state banks, the issue of non-bank financial institution remains partly unresolved and regulatory equity is one of the issues that needs to be achieved," she said.
The government is aware of it, she added.
"We also had a FSAP. So there are issues working at that and this is something that is why not yet fully achieved, but is entrained. While there are problems at this stage, increased attention to lending practices of non-bank financial institutions continue to be very important," Gulde-Wolf said.
Responding to a question, she said India overall has a fairly high level of debt and fiscal consolidation needs to be a priority.
"However, implementing fiscal consolidation in the context of a federal system is much more complicated. The level of fiscal structural issues and challenges are different in different states," she said.
So one of the ways in which the IMF is engaged in this question is it has a regional training institute that has started working with the individual states on strengthening fiscal management at the state level, Gulde-Wolf said.
In the context of surveillance engagement with India, she said, the IMF is increasingly placing emphasis on the need to better coordinate the fiscal state level activities and fiscal activities.
"But it is a concern that the authorities are taking serious and are working at," Gulde-Wolf said.

RBI vs Govt: Will the Centre have its way by invoking an 83-year-old rule?

India’s monetary policy makers and government officials will meet Monday in a board meeting that promises to be anything but its usual dull affair.
Locked in a power struggle over how much capital the central bank needs and how tough its lending rules should be, a trained accountant parachuted into the Reserve Bank of India’s board by the government in August may be key to whether a compromise can be found or whether the already public spat turns even uglier.
Swaminathan Gurumurthy, a chartered accountant turned newspaper columnist, has set the tempo by chiding the monetary authority for being too tough in its efforts to rid banks of bad debts and arguing the case for lower reserves -- a step that would give the government more cash ahead of an election year.
ALSO READ: A short history of RBI's turbulent relationship with the government
The central bank -- led by Governor Urjit Patel -- has pushed back against the moves, keen to burnish its inflation-targeting credentials and clean up one of the world’s worst bad-debt piles. Patel’s deputy took the spat public in late October in a fiery speech in defense of central bank independence.
For a nation that relies on imported capital to fund investment, failure to reach middle ground threatens to erode investor confidence in the world’s fastest-growing major economy. Those elevated stakes are making Monday’s meeting in Mumbai a must watch affair for India market watchers.

ALSO READ: India's central bank dilemma: Here's why RBI's Urjit Patel should hold firm
Gurumurthy, who is associated with the economic wing of Rashtriya Swayamsevak Sangh -- the ideological parent of Modi’s Bharatiya Janata Party -- and is a champion of small-traders who are BJP’s key voting bloc, was chosen by the government to push easier access to credit for micro and medium-sized enterprises. Lending to the sector has suffered after the RBI tightened norms for state-run banks saddled with bad debts.
The central bank, which is also the banking regulator, may be open to easing tight money conditions in the banking sector by injecting cash through open market purchases of bonds. But it’s unlikely to part with its reserves as some of these are notional, and may resist relaxing capital buffers for banks.
ALSO READ: Truce between government, RBI after seniors step in to resolve issues
The government can still have its way with the RBI by invoking a rule that hasn’t been used in the central bank’s 83-year history. The finance ministry last month sought Patel’s views on the issues of contention by citing Section 7 (1) of the Reserve Bank of India Act.
The RBI’s board is only meant to advice and guide and not decide on policy issues, people familiar with the matter said. But Gurumurthy and the government nominees Subhash Chandra Garg and Rajiv Kumar have been vocal about bank supervision, flow of credit to industry and easier financial conditions for India to overcome a crisis in its shadow banking sector.
ALSO READ: Govt proposes change in rules for closer oversight of RBI, empowering board
An activist board has not been taken too kindly by the RBI. While the first clause of Section 7 confers powers to the government to give directions, the third part indicates that the governor shares power with the board, the people said, adding that the powers of the governor are reiterated in another section of the RBI Act.
The government is separately seeking more powers to supervise the central bank, a departure from the board’s current role as an advisory body, people with knowledge of the matter said.
“Having Gurumurthy on RBI board has complicated the situation,” said Mohan Guruswamy, a former finance ministry official and chairman of the Centre for Policy Alternatives in New Delhi, who has know Gurumurthy for years. “He wants banks to give money to non-bank finance companies, which are already in a mess. He’s an RBI director. It’s not his grandfather’s money.”

IMF says India's economy is an elephant that's starting to run, flags risks

India is on track to hold its position as one of the world’s fastest-growing economies as reforms start to pay off, according to the International Monetary Fund.
The $2.6 trillion economy was described by Ranil Salgado, the IMF’s mission chief for India, as an elephant starting to run, with growth forecast at 7.3 per cent in the fiscal year through March 2019 and 7.5 per cent in the year after that. The nation accounts for about 15 per cent of global growth, according to the Washington-based fund.

Key risks flagged by the IMF in its annual Article IV assessment of the economy include higher oil prices, tightening global financial conditions and tax revenue shortfalls. Authorities should take advantage of stronger growth to bring down debt levels, simplify the consumption tax system and continue to gradually tighten monetary policy, it said.
ALSO READ: IMF warns India over public sector banks, advocates privatisation
After a shock cash ban in late 2016 and a disruptive nationwide sales tax last year, India’s economy is once again gaining momentum. Growth reached the fastest pace in seven quarters in January through March, and high-frequency indicators from purchasing managers’ surveys to auto sales data show the economy is likely to grow above 7 per cent.
chart
The government is due to release gross domestic product data on Aug. 31 for the three months ended June.
A high growth rate may not necessarily resonate with voters in elections next year as they continue to face issues such as unemployment and farm distress.
There are other risks. The rupee has plunged 7 per cent against the dollar this year, the worst performer among major Asian currencies, threatening the inflation outlook. The Reserve Bank of India delivered its second straight interest rate hike last week as policymakers seek to maintain economic stability against a global backdrop of trade tensions and high oil prices.
Continuing structural reforms would be key to high growth, Salgado said in a conference call. Further rationalization of the goods and services tax would give maximum benefits, and labour reforms would be an incentive for companies to expand, he added.
Other key points from the report:
Recovery is underway led by an investment pickup
External vulnerabilities remain contained but have risen
India’s export market share remains low; need to boost competitiveness
There’s need for maintaining exchange rate flexibility
FX intervention should be two-way and limited to disorderly market conditions
Government debt and budget deficit key macroeconomic challenges
Need labour, land and product market reforms for jobs growth
More needs to be done to ensure the health of state-run lenders

$164 trillion in debt: Why the world is unprepared to tackle next recession

The world’s debt load has ballooned to a record $164 trillion, a trend that could make it harder for countries to respond to the next recession and pay off debts if financing conditions tighten, the International Monetary Fund said.
Global public and private debt swelled to 225 percent of global gross domestic product in 2016, the last year for which the IMF provided figures, the fund said Wednesday in its semi-annual Fiscal Monitor report. The previous peak was in 2009, according to the Washington-based fund.
“One hundred and sixty-four trillion is a huge number,” Vitor Gaspar, head of the IMF’s fiscal affairs department, said in an interview. “When we talk about the risks looming on the horizon, one of the risks has to do with the high level of public and private debt.”
The global debt burden clouded the IMF’s otherwise upbeat outlook of the world economy, which is in its strongest upswing since 2011. The fund on Tuesday forecast expansion of 3.9 percent in 2018 and 2019, while saying in subsequent years the global economy could be impacted by tighter monetary policy and the fading effects of U.S. fiscal stimulus.
Surging private-sector debt, particularly in China, is driving the build-up. China has accounted for almost three-quarters of the increase in private debt since the global financial crisis, according to the fund.
Graph
The IMF figures lay bare the scale of the debt hangover from which the world is still recovering a decade after the financial crisis pushed the global banking system to the brink and tipped the world economy into recession. Governments increased spending to boost growth, while central banks resorted to unconventional methods to ease financing conditions, such as buying bonds.
High levels of sovereign debt could make it difficult for governments to refinance when their debt reaches maturity, especially if financing conditions tighten, the IMF said. Large debts also impede the ability of nations to increase spending if their economies fall into recession, and may cause a drag on growth, according to the fund.
The IMF said countries should take decisive action to rebuild their fiscal buffers so they can increase spending during hard times. The fund urged the U.S., whose budget deficit is expected to surpass $1 trillion by 2020, to “recalibrate” its fiscal policy so government debt-to-GDP levels decline over the medium term.
The combination of last year’s tax cuts and increased government spending in a recent U.S. budget deal will benefit all income groups, the IMF said. However, those in the top quintile of incomes would benefit the most, followed by those in the bottom quintile, the fund said. As a result, the measures may contribute to the further “hollowing out” of middle-class incomes, it said.

Graph
Many governments have troubling debt-to-GDP levels, according to the fund. More than one-third of advanced economies had debt-to-GDP levels above 85 percent, three times more nations than in 2000, the IMF said. Among major economies, Japan had the highest debt-to-GDP level last year, at 236 percent, followed by Italy at 132 percent and the U.S. at 108 percent.
Meanwhile, a fifth of emerging markets and middle-income countries had debt levels above 70 percent of GDP, led by Brazil at 84 percent and India at 70.2 percent. Gross government debt in China stood at 47.8 percent last year, according to the IMF.

Some MPC members doubt if growth would be sustainable: RBI minutes

Before the Reserve Bank of India’s (RBI’s) monetary policy announcement, the members of the Monetary Policy Committee (MPC) were worried as to whether growth could sustain even as inflation fears persisted, according to the minutes of the two-day meeting.
The six-member MPC met for two days, on April 4 and 5, to decide, with a five-to-one vote, that the policy repo rate should remain unchanged at 6 per cent.

RBI Deputy Governor Viral Acharya said he would favour rate hikes in future, but not now.
“I feel it is important to let some more hard data come in, especially on growth, and allow some more time to let the early skirmishes on the global trade front play out. I am, however, likely to shift decisively to vote for a beginning of ‘withdrawal of accommodation’ in the next MPC meeting in June,” Acharya said.
“Reinforcement of inflation-targeting credibility that such a shift would signal is crucial in my view for prudent macroeconomic management, on both the domestic and external sector fronts,” the deputy governor said.
The dissenting member, Executive Director Michael Debabrata Patra, voted for a 25-basis-point hike in the policy repo rate, casting doubts as to whether falling prices would sustain.
Patra said even as the fall in the inflation rate in January and February would continue in March, it didn’t make a case for an easier or neutral monetary policy stance.
“In my view, that will be time-inconsistent and will push the achievement of the inflation target farther out in time, given the current assessment that the target is not likely to be achieved during the full course of 2018-19, absent policy action,” Patra said.
Core retail inflation has remained sticky and the rate has “stubbornly” risen above 5 per cent over the past three months.
“Over the course of 2018-19, inflation in this category is expected to peak close to 6 per cent in June and moderate in the rest of the year to settle at a little above 5 per cent,” Patra argued.
Patra said “impulses of growth are strengthening,” and are led by the pace of investment, in contrast to consumption-led growth in preceding years.
However, Chetan Ghate, an external member, doubted if those impulses would sustain.
“My main concern in the last few reviews has been whether the ongoing cyclical recovery in growth will sustain, despite growing discomfort on the upside risks to the 4 per cent inflation target in the medium-term,” said Ghate.
“There is a risk that the recent fraud in a public sector bank may make banks risk-averse and slow in lending,” Ghate said, voting for a pause and waiting for more data.
RBI Governor Urjit Patel, however, said the credit offtake was improving and becoming broad-based. Besides, the flow of funds from non-bank sources to the corporate sector was rising.
However, he said inflation risks persisted.
“Even as inflation has moderated in recent months, several upside risks to inflation persist. Hence, I would like to wait for more data and watch how various risks to inflation evolve,” said Patel.
According to Ravindra Dholakia, who had earlier favoured rate cuts, the inflation rate is likely to rise from April for the next three-four months because its base is low, before again start declining.
Dholakia said while capacity utilisation had improved marginally to 74 per cent from about 72 per cent, “it is still far below the threshold required to induce substantial fresh investment”.
Pami Dua, another external member, favoured a wait-and-watch policy, but said changes in minimum support prices should be “pursued in a systematic way to maintain the durability of the medium-term 4 per cent inflation target”.
Header: AT A GLANCE
·Viral Acharya says will change his stance in June
·Some members doubt if growth would be sustainable
·MPC sounded concern on inflation
·Capacity utilisation not enough to induce fresh investment
·MSP needs to be studied more to say if it would derail inflation target