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  Business   Economy  06 Aug 2018  ‘RBI rate hike won’t affect growth much’

‘RBI rate hike won’t affect growth much’

Published : Aug 6, 2018, 12:09 am IST
Updated : Aug 6, 2018, 12:09 am IST

Consumer prices hardened to five per cent in June, from 4.87 per cent in May.

Subhash Chandra Garg
 Subhash Chandra Garg

New Delhi: Two successive repo rate increases by the Reserve Bank of India (RBI) is unlikely to affect the country’s economic growth adversely in the Q1, said a senior finance ministry official.

“The basic mandate given to the Reserve Bank of India is inflation management. It’s a government given target. In 2016, the government told RBI to manage inflation at four per cent with two per cent either plus minus so that maximum limit is six per cent. The Consumer Price Index is now five per cent, core inflation is six per cent. RBI has very legitimate reasons to use its instruments to check inflation.  Theoretically and logically,  it always appears that an increase in (repo) rates would affect the growth but the fundamentals of the economy which are also even cited by Reserve Bank of India (RBI)  policy statement suggests that the  growth momentum is continues. We are expecting good Q1 numbers. I don’t think that the repo rate hike will affect the growth momentum adversely,” department of economic affairs secretary Subhas Chandra Garg told this newspaper in an exclusive interview.

 

With inflation inching up, RBI had to bite the bullet and hiked repo rates by 25 basis points for the second time in a row to 6.50 per cent in its third bi-monthly monetary policy review of FY19. It was a back-to-back interest rate increase. In its June policy meet, RBI had raised repo rate by 25 basis points to 6.25 per cent — the first rate hike since Prime Minister Naren-dra Modi came to power in May 2014. This is the first time since October 2013 that the rate has been increased at consecutive policy meetings.

Consumer prices hardened to five per cent in June, from 4.87 per cent in May. With this, the pace of retail inflation climbed for the third consecutive month. The headline inflation has been well above the four per cent target and core inflation — minus food and fuel — has remained stubborn.

 

RBI’s moves were seen by many economists and market experts as clashing with the recovery in the economy after a long spell of low growth.

The Indian economy has been in the midst of internal and global challenges like US-China trade war, US interest rate trade cycle, high crude oil prices, high retail inflation, depreciating rupee but is holding on its strong macro strength.

The secretary said rising and high oil prices are always a concern for the government as India’s almost entire oil requirement is met by imports. He said that the government is also keeping a tight watch on the Iran oil sanctions developments as India imports a majority of oil from there.

 

“Oil had been a matter of concern  because we are fully dependent on oil imports. It constitutes a major part of our import bill. When the prices go up and availability gets reduced, then it makes a lot of difference to our import bill which then play out differently. We need to watch oil price movement carefully. A month back we had much higher oil prices at $80 per barrels... at present we have relatively lower prices. Still  higher than last year with about $72-73. This indicates market forces will play out in case the Iranian oil supply gets affected. Let’s hope the Iranian situation does not get worse. We import a major part of oil requirement from Iran. First of all, the global overall oil supply should not get affected. If that gets affected, then  prices will rise. Next our supplies should be fully tied up. So there is no final word on that situation. Its still evolving.  We should be concerned but not panic,” he said.

 

On high bond yields which stand at 7.79-8 per cent, Mr Garg said the rates are still high but softened a bit. But he insisted that they cannot be planned. FPIs if make a comeback in a big way to invest in the Indian equity, the yield may go down.

“We cannot plan bond yields. Yields have gone up, of late. But they have softened now. They suddenly seemed to have peaked. So, there will be a stable return. At the much more broader level, if FPIs start coming in to invest in India, there might be some further movement (yields may go down) in the bond market. But currently there is stability and there’s no volatility,” he said.

India’s 10-year bond yield in July hit a two-month low on surprise open market operation by the RBI. The benchmark 10-year bond yield was mostly trading at 7.73 per cent.  

 

Having indicated earlier that the government may cut down on borrowings in the second half of FY19 by choosing not to buyback bonds, Mr Garg said, “We will take a view on whether to cut down the borrowing or not in September.  The buyback is one factor on which we will take a view. How much of it we need to do and how much not will depend upon the situation in September when the second half targets will be ascertained.”

He said the entire pla-nned expenditure programme is going on smo-othly and expenditure is at 29 per cent of budget estimate. It indicates a very good fiscal performance and capital expenditure is also on the rise.

The senior official, however, said that the economy cannot be insulated from the global developments but the situation is not panicky. An example of that, he said, is FPIs have started showing faith in the Indian markets after pulling out $9 billion from the market over last few months.

 

As per data, overseas investors have pulled out nearly Rs 48,000 crore from the Indian capital markets in the first six months of 2018, making it the steepest outflow in a decade after high crude prices and trade war worries.

But in July, he said there is always a massive interplay of trade, currencies, investment inflows, oil prices — all of them play a very important role. So no single factor ever determines the final picture.

Looking for India at this moment, investment inflows were our worry for some time because in first quarter we saw outflow of $9 billion.

In July it was positive. After selling more than Rs 20,000 crore worth stocks in April-June, foreign investors have pumped in over Rs 2,200 crore into Indian equities in July.

 

By arrangement with the Financial Chronicle

Tags: reserve bank of india (rbi), subhash chandra garg