RBI Governor, Dr. Raghuram Rajan has spoken out against Quantative Easing (QE) by Central Banks in global forums over the last three months, the last one in May 2014 in Japan. He is worried about the concerted printing of money by the Fed, ECB, Bank of Japan and Bank of England and believes that repercussions on emerging economies could be severe on withdrawal of easing.
The question is whether his uneasiness over QE is translating to policy actions in India. RBI had to fire fight a falling INR in June and July last year when the currency went on a free fall to record lows against the USD on worries of the Fed tapering asset purchases. The central tightened liquidity, pushed up borrowing costs and cut speculative limits to fight the currency crisis.
The INR is much stronger than what it was last year, gaining 15% from lows seen in August 2013. The Fed has cut asset purchases by USD 40 billion since December 2013 and markets have taken it extremely well. However the RBI is still wary of a currency crisis and is keeping rates on hold and is also keeping liquidity on a tight leash.
RBI is expected to keep repo rates at 8% in its policy review on the 3rd of June as it has signalled its intentions to maintain rates at current levels until CPI inflation is well on its way towards 6% by end of fiscal year 2016. The central is also monitoring liquidity by conducting term repo and reverse repo auctions so that liquidity does not slosh about causing speculative bubbles.
Markets should expect the RBI to keep rates steady over the full year of 2014, even if CPI falls on base effect in the June to November period. CPI is at around 8.5% levels as of May 2014.
The fact that the INR is stabilizing at higher levels despite tapering of asset purchases by the Fed has not translated into loosening of policy, at least on the liquidity side. RBI is clearly not willing to loosen policy as yet on misgivings about the effects of withdrawal of stimulus by the Fed and other central banks.
Is the RBI misplaced in this belief and is it effectively postponing policy easing to stimulate domestic economic growth? India’s GDP grew 4.7% in fiscal 2013-14, up from 4.5% seen in fiscal 2012-13 but still close to decade low growth rates. Demand drivers are absent as seen from negative growth in industrial production, manufacturing and consumer durables in the last fiscal.
The new government at the centre led by PM, Narendra Modi would want to put the economy back on track. However first it has to address fiscal concerns given that government debt has ballooned by three times over the last six years. Inflation too is given priority, as it was key factor in the debacle of the UPA in 2014 elections. The government does not have much leeway to push growth except through reforms that work with a lag.
RBI maintaining a leash on policy coupled with a government that is fiscally strained will lead to growth being the victim. A couple of years of weak growth is fine if it will lead to sustainable growth going forward. However if monetary policy is formulated on worries of global repercussions on withdrawal of stimulus by central banks, a repercussion that may not happen in many years to come, then it is time to rethink on policy.