RBI: Whatever it takes
Dear Readers,
"It's once again 'whatever it takes approach' going into the third year of the pandemic, given the challenges and uncertainties," Reserve Bank of India governor Shaktikanta Das said after unveiling the monetary policy review.
That approach has held the central bank under Das in good stead in the last two years, when it tried out-of-the-box measures and flooded the economy with liquidity to provide succour during the pandemic and prop up growth even during lean times. The arsenal of foreign reserves RBI built has turned out to be a foresighted decision as it has been able to successfully defend the rupee.
"In an ocean of high turbulence and uncertainty, Indian economy is an island of macroeconomic and financial stability,"
Das said, despite two Black Swan events (The pandemic and the Russian invasion of Ukraine) happening one after the other and multiple shocks.
At this juncture, inflation, which is mostly due to global supply-side constraints, seems to have peaked, and the RBI sees it receding by the fourth quarter. Yet it remains above the RBI's comfort zone, which has led the central bank to frontloaded rate hikes. The consensus is that RBI may go for another 25-30 bps increase before it pauses the rate-hike cycle.
Backed by the huge foreign reserve pile and a resilient domestic economy, the RBI is well-poised to tackle the challenges arising out of geopolitical situations and supply-side crunch.
Now the focus, according to Das, will be on safe and soft landing of the economy.
Yet he is still in a hard place. While at around 3 per cent, the CAD is much lower in percentage terms than it was during the taper tantrum days of 2013, at over $100 billion, it is much higher in absolute terms, and may prove to be onerous to finance in the times of global rate tightening.
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While the rate hikes will help in reducing inflation and support the rupee, they will surely bring pain to a lot of borrowers since the transmission of rates is almost instant with a high proportion of loans linked to the external benchmarks.
The biggest brunt will be faced by the retail and MSME loans even as the large corporate sector may escape as their loans are not linked to external benchmarks. The deposit rates are yet to catch up with the policy rates, but will eventually, giving relief to savers.
There may be a short-term pain in the form of higher rates, but in the medium term, lower inflation will raise real incomes.
Yet there are uncertainties clouding the optimistic outlook. A new Black Swan may emerge just in the neighbourhood with China escalating tensions in the Taiwan strait. So, as the RBI governor said, the monetary policy will have to be measured, calibrated and nimble.
While it culminated in the MPC rate hikes, this week saw GST collections for July rising to the second highest ever of Rs 1.49 lakh crore and the end of the 5G spectrum auction which netted Rs 1.5 lakh crore for the government. As the foreign portfolio investors returned, the Sensex rose for the most part of the week.
We interviewed?Akash Sinha, Co-founder and CEO, Cashfree Payments , and ETBFSI Explainer has all the details about?Positive Pay System (PPS) . As always, I am adding here the top five stories of the week that you shouldn't miss. If you have any thoughts or feedback, please feel free to share them with me at?[email protected]
Happy Reading, Happy Weekend
Editor, Amol Dethe , ETBFSI