The irrelevance of RBI's credit policy

The first credit policy announcement for the financial year 18-19 by the six-member Monetary Policy Committee (MPC) is virtually rewarding and accommodative to the bankers, who are in the news for all the wrong reasons.

The MPC has acted on expected lines and have maintained status quo on the key policy rates. The decision was 5:1 with Michael Patra vociferously recommending a 0.25% rate hike, as he envisages certain inherent risks. The MPC is happy with the normalisation of demonetisation effects, GST teething problems, industrial activity picking up and the services sector fairing very well with CPI inflation in the comfort zone of 4.4.

The MPC's neutral stance with dovish tone seems to be desperate in helping the banks to clean up their balance sheets, boost customer confidence, promote and nurture the nascent growth by deferring the implementation of Indian Accounting Standards (Ind-As) by one year which had to be otherwise put in place from April 2018. This would have necessitated huge provisioning and stringent classification of NPAs.

The RBI has also allowed banks to defer the recognition of mark - to - market (MTM) losses on their bond portfolios as at December and March 2018 by spreading them over next four quarters. Immediate positive result was fall in the 10 year bond yield by 7 basis points even as the MPC announcement of credit policy was in progress.

The RBI may also provide four quarters for PNB for staggering loss provisions against the mega banking fraud of Rs 12,646 crore of Nirav Modi. Shockingly, two critical issues have not found place either in the policy or from the regulatory front - status of Non Performing/Stressed Assets, frauds and sharp practices that have taken place both in public and private sector banks, audit processes, corrective and preventive steps that have been taken to arrest/mitigate such frauds, which have virtually shaken the country in general and public confidence in the banking system in particular.

Second, no mention on the details of credit and deposit off take, liquidity issues and methodology of change over to a new benchmark for interest rate determination from the present MCLR (marginal cost of lending rate) mode. This has put the new borrowers at a rate advantage with those who have availed prior to April 2016 who are on the "base-rate" benchmark.

The repo rate - the rate at which banks borrow from RBI - is unchanged at 6%. So are the other policy rates - reverse repo rate @ 5.75%, the cash reserve ratio - a share of deposits which banks must park with RBI without earning any interest at 4% and the statutory liquidity ratio (SLR) - the reserves banks are required to maintain in the form of gold or government approved securities/bonds - unchanged at 19.5%.

The consumer price index (CPI) inflation has mellowed to 4.4% in February vis-a-vis MPC's revised upward projection to 5.1% for Q4 FY 2018 ( January - March 2018) during the last policy announcement.

The March CPI will be still lower around 4%. The MPC is continuously tinkering with the glide path range of CPI, GDP / GVA which exposes RBI's projection 'competence'. Shifting goal posts puts RBI in poor light and fait accompli to economic situations. Even the gross value added (GVA) for the just concluded FY 2018 has been revised downwards to 6.6% from 6.7%.

To validate the MPC's / RBI's predicament, the projections of CPI inflation has again been revised downwards to 4.7%-5.1% for April-September FY19 which was revised upwards in the range 5.5-5.6% during the last policy review. The October 2018 - March 2019 CPI estimate has also been cut to 4.4% from 4.5% announced during the last review. GVA has been replaced with GDP in this review. Policy adhocism and commercial banks increasing the MCLR, leading to increase in lending rates and hike in deposit rates in contrary to RBI's policy directions shows lack of enforceability of the 'supreme regulator' and perhaps the irrelevance of credit policy itself and RBI becoming a "Reactive Bank of India."

The MPC is seriously concerned about the upside risks of inflation on account of fiscal slippages both at the central government and by the state governments, mainly on account of huge farm loan waivers, HRA effect of the 7th pay commission which will taper off by September 2018, big push in infrastructure and bank recapitalisation, amounting to around Rs 8.5 lakh crore, mounting crude oil price in the range of $67-70 per barrel, liberal spending keeping in view of elections. The inflationary effects on account of the minimum support price (MSP) of 150% of the production cost on kharif crops is also worrisome to the MPC as neither the methodology nor the quantum have been finalised by the central government. The MPC has also taken into account the corporates woes of increase in both input and output costs which will put pressure on the prices. Urjit Patel has stated "while global economic activity has gathered momentum and span, financial market volatility and potential trade wars pose a threat to the outlook." With such a strong statement and huge upside risks of inflation, the MPC's stance of "dovish" tone is intriguing.

(The writer is a Bengaluru-based economist and banker)

 

 

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