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RBI Monetary Policy : To cut or not to cut

Ali Azar




The last few months have been a roller coaster ride for our country in terms of macroeconomic indicators. Sitting at the helm of this bi-polarity of macroeconomic factors is everyone’s favourite commodity – Oil. Considering India’s heavy dependence on oil (said to be the fourth largest consumer in the world) and the fact that majority of it is imported (pegged to be in excess of 80%), it can safely be said that our country’s purse strings are firmly tied to the price of what the Saudis call liquid gold (oil). Crude oil in India hit a high of 85 $ per barrel in early October and cooled off to roughly 60 $ per barrel by end November. While the biggest benefactor of this U-turn in prices may be the common man, the volatility of global oil prices undoubtedly has an adverse effect on the decision making policy of the Reserve Bank of India (RBI). Being a heavy guzzler of oil, many other crucial macroeconomic indicators of our economy are intrinsically tied to the price of oil such as currency exchange rate, current account deficit, interest rates, inflation, GDP growth etc. The two most important indicators i.e. interest rates and inflation fall squarely in the domain of the RBI which is solely responsible to ensure that inflation does not exceed the targeted limit by keeping interest rates in check.

It is against the backdrop of these uncertain times that the RBI came out with its fifth bi-monthly monetary policy review yesterday afternoon. No major surprises were thrown at us and the policy was enacted on expected lines. The central bank did not alter its policy stance of “calibrated tightening” which it adopted in the immediately previous monetary policy review in October in accordance with the then-deteriorating conditions owing to rapidly rising oil prices. The Urjit Patel led outfit kept repo rates unchanged and cut its inflation forecast for the rest of the financial year owing to a steep decline in crude prices and food deflation.

Important parameters of the meet

This policy was broadly seen as a dovish policy which paves the way for a neutral stance in the forthcoming policy with inflation projections being significantly lowered. In spite of the shift in policy stance to calibrated tightening in the previous meeting, meaning that the central bank intended to raise rates in the following meetings, the downward swing in food inflation and oil prices might actually result into rates being slashed in the coming MPC meeting on 7th Feb 2019, which is a rarity. The RBI did not change its policy stance, although the governor did indicate that policy course could be changed soon because only the food inflation and oil prices have reduced (major components of inflation), while core inflation (inflation not considering food and energy sectors) continued to rise. The worry is that food and oil prices are extremely volatile and could bounce back at the same accelerated pace at which it reduced, hence the 6 member MPC decided to sit it out and take a call at a future date about rate reduction.

Other announcements made at the bi-monthly meet of the country’s top banking institution was the continued use of open market operations (OMO) to infuse liquidity into the ever thirsty economic system which has brought down the liquidity deficit to an eight-month low with Deputy Governor Viral Acharya mentioning the pace and quantum of such purchases may continue till March. Another important announcement was that of linking floating rate loans for retail and small & medium enterprises to external benchmarks such as repo rate, 91 or 182 day T-Bill rate or other approved benchmarks instead of to marginal cost of lending rate (MCLR) which brings uniformity and transparency into the process.

A wait and watch policy with minor tweaks to bring it up to date was what we got from our central bank this time around. The RBI, known to be a conservative organisation did not deviate from its mantle and threw out no surprises. It kept its calm in the face of its worst adversary, volatility, and frankly, that’s exactly what we’ve come to expect from our most sacred banking institution under the current leadership


RBI : Resignation Becomes Inevitable

Ali Azar



What happens when an unstoppable force meets an immovable object? A collision of epic proportions that has far ranging effects. No! We’re not talking about the phrase that is referenced in Christopher Nolan’s Oscar winning 2008 epic “The Dark Knight” when the Joker, who is an unstoppable criminal force, comes up against Batman, who is an incorruptible vigilante crusader. We’re talking about the effect our financial system and economy will be forced to undergo when the dust finally settles on the fall out between the unstoppable Narendra Modi led political machinery of the Bharatiya Janata Party (BJP) collides with the immovable and incorruptible erstwhile Governor Urjit Patel led outfit, the Reserve Bank of India (RBI).

Amid an already volatile political and economic atmosphere which includes state election results, unfavourable macroeconomic conditions and weak global cues, we were thrown further off balance when the Governor of RBI, Urjit Patel put in his papers at close of business hours on Monday – with immediate effect. One could say that the writing was already on the wall, as the two heavyweights (FM Arun Jaitley and Urjit Patel) did not see eye to eye on a host of issues ranging from economic capital framework, regulatory norms such as PCA, nominees on the board of RBI, transfer of reserves and liquidity crisis among others. Even the long 9 hour meeting held on November 19th between the top brass of finance ministry and RBI officials ended with an uneasy truce without a firm agreement.

Important issues among others that may have finally provoked the RBI Governor to snap the cord

Autonomy is the most sacred pillar on which the foundation of the RBI is built and there are far too many allegations that the BJP led government is systematically eroding institutions in the country to throw cold water on. Urjit Patel who was the 24th governor of the RBI took up office on 4th September 2016 and was expected to remain incumbent until September 2019. His resignation gives him the undesirable distinction of being the first governor since 1990 to step down before his term ends. The effect of his resignation is yet to be felt in the financial system and stock markets, most sensitive of which are the sentiments of foreign investors (FII’s) who consider interfering with the central bank’s independence to be a touchy topic. Rating agencies are another important element in this equation and an unfavourable outlook by such agencies could see massive outflows of capital from the country at a time when we can ill afford it.

The timing of this resignation is also cause for suspicion. It is likely the governor had made up his mind to quit a while back, but may have been coaxed into announcing it only a day prior to the results of the all-important state elections, so as not to hamper the chances of the incumbent government when polling was on. It was no surprise that comments poured in from all quarters of the political and economic spectrum, some in support and some against the decision, with the statement of former governor Raghuram Rajan resonating the most, who warned that the entire country should be worried and that it is a matter of great concern. Traditionally, the RBI is a conservative organisation whose board is meant to act in an advisory capacity. But, with government intervention at every step of the way, its board is being moulded to become an operational one, which goes against its basic character

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Important for Indian govt to heed RBI’s message on financial stability: IMF Chief Economist





“I think their (RBI) message that financial stability is important is correct. And it is important for the government to heed that,” Obstfeld said.


Washington| It is important for the Indian government to heed the RBI’s message on financial stability, IMF‘s Chief Economist Maurice Obstfeld said Sunday, amidst reports of friction between the central bank and the Finance Ministry.

Addressing a group of journalists here, he also said the International Monetary Fund does not want politicians “manipulating” central banks for political ends.

“There is debate over whether it’s better for financial stability to be the remit of the central bank or an independent regulator…the UK in 1997, split them, then put them back together again. I’m not going to take a position on that…But I think…the central bank does have to be intimately concerned with financial stability to some degree and with the payment system,” he said, responding to a specific question on the recent developments in India regarding the RBI and the government.

“We need to think about what is the best institutional framework in which fiscal policy can be set with regard to the long-term stability of the economy, not just to performance over political horizon,” Obstfeld said.

“Well, I think they (the RBI and the Indian government) have reached an agreement on how to proceed. I think their (RBI) message that financial stability is important is correct. And it is important for the government to heed that,” he added.

Responding to a series of questions on the attempt in certain countries like the US, India, Argentina and Turkey to curb the independence of central banks, Obstfeld said central banks’ role as a financial regulator is critical.

Central banks have “much greater power than you thought”. They are fundamentally involved in financial stability policy, in fiscal policy, he said.

Obstfeld said if one looks at the record, the decisions taken by central banks worldwide did stabilise the economy by avoiding much worse losses in output and employment.

However, at the same time, he said, their moves also raised questions of transparency and accountability.

“So, it’s not a shock that people raise these questions and it does create a challenge for central banks to be more transparent and to communicate more effectively with a broader public about what they are about and what they are doing,” Obstfeld said.

If the central bank cannot communicate more effectively about what it is doing, then there is a possibility of political manipulation where politicians attack the central bank and undermine it, he said.

“Clearly, we don’t want politicians manipulating the central bank for political ends,” Obstfeld added.

After serving as IMF’s Chief Economist for more than three years, 66-year-old Obstfeld is set to retire this month-end and will return to the University of California, Berkley. Gita Gopinath, Indian American economist from the Harvard University, would replace him from the first week of January.

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India to retain top position in remittances with USD 80 bn: World Bank




World Bank

The World Bank estimates that officially-recorded remittances to developing countries will increase by 10.8 per cent to reach USD 528 billion in 2018.


Washington| India will retain its position as the world’s top recipient of remittances this year with its diaspora sending a whopping USD 80 billion back home, the World Bank said in a report Saturday.

India is followed by China (USD 67 billion), Mexico and the Philippines (USD 34 billion each) and Egypt (USD 26 billion), according to the global lender.

With this, India has retained its top spot on remittances, according to the latest edition of the World Bank’s Migration and Development Brief.

The Bank estimates that officially-recorded remittances to developing countries will increase by 10.8 per cent to reach USD 528 billion in 2018. This new record level follows a robust growth of 7.8 per cent in 2017.

Global remittances, which include flows to high-income countries, are projected to grow by 10.3 per cent to USD 689 billion, it said.

Over the last three years, India has registered a significant flow of remittances from USD 62.7 billion in 2016 to USD 65.3 billion 2017. In 2017, remittances constituted 2.7 per cent of India’s GDP, it said.

The Bank said remittances to South Asia are projected to increase by 13.5 per cent to USD 132 billion in 2018, a stronger pace than the 5.7 per cent growth seen in 2017.

The upsurge is driven by stronger economic conditions in advanced economies, particularly the US, and the increase in oil prices have a positive impact on outflows from some GCC countries such as the UAE which reported a 13 per cent growth in outflows for the first half of 2018.

Bangladesh and Pakistan both experienced strong upticks of 17.9 per cent and 6.2 per cent in 2018, respectively, the Bank said.

For 2019, it is projected that remittances growth for the region will slow to 4.3 per cent due to a moderation of growth in advanced economies, lower migration to the GCC and the benefits from the oil price spurt dissipating.

The Gulf Cooperation Council (GCC) is a regional inter-governmental political and economic bloc of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE.

As global growth is projected to moderate, future remittances to low- and middle-income countries are expected to grow moderately by four per cent to reach USD 549 billion in 2019. Global remittances are expected to grow 3.7 per cent to USD 715 billion in 2019.

The Brief notes that the global average cost of sending USD 200 remains high at 6.9 per cent in the third quarter of 2018. Reducing remittance flows to three per cent by 2030 is a global target under Sustainable Development Goal (SDG) 10.7.

Increasing the volume of remittances is also a global goal under the proposals for raising financing for the SDGs, it said.

“Even with technological advances, remittances fees remain too high, double the SDG target of 3 per cent. Opening up markets to competition and promoting the use of low-cost technologies will ease the burden on poorer customers,” said Mahmoud Mohieldin, Senior Vice President for the 2030 Development Agenda, United Nations Relations, and Partnerships at the Bank.

The average cost of remitting in South Asia was the lowest at 5.4 per cent, while Sub-Saharan Africa continued to have the highest at 9 per cent.

No solutions are yet in sight for practices that drive up costs, such as de-risking action of banks, which lead to the closure of bank accounts of remittance service providers.

Another persistent factor that keeps fees high is the exclusive partnership between national post office systems and any single money transfer operator, as it allows the operator to charge higher fees to poorer customers dependent on post offices, the Bank said.

“The future growth of remittances is vulnerable to lower oil prices, restrictive migration policies, and an overall moderation of economic growth.

“Remittances have a direct impact on alleviating poverty for many households, and the World Bank is well positioned to work with countries to facilitate remittance flows,” said Michal Rutkowski, Senior Director of the Social Protection and Jobs Global Practice at the World Bank.

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