Ever since the first pause on repo rate hike happened in June, the stock market, treasury heads at financial services companies, bankers, and other interest stakeholders (including even the retail borrowers) have more or less assumed that it’s the end of the rate hike cycle. What’s more, is the constant guessing game on when the monetary policy committee would start considering a rate cut.

In that sense, the Monetary Policy Committee’s decision to keep the repo rate unchanged at 6.5 per cent was almost like a foregone conclusion, and the BSE Sensex reacting positively, increasing by over 370 points (up 0.5 per cent) reiterates the jubilance.

But if one weighs the Governor’s speech on Friday when he presented the fourth MPC decision, it should put a lid on the ultra-optimistic view that a section of market participants seem to have.

The RBI hasn’t tinkered with GDP projections and growth expectations; there isn’t a shade of pessimism to suggest the need to be concerned about the overall macro-economic situation. Yet, in a very subtle manner, RBI Governor Shaktikanta Das has layered and measured each of his statements with a tone of caution, and rightly so.

Global crude prices, a major influencer on domestic inflation, has been volatile lately. Geopolitical concerns haven’t abated yet, and global trade is contracting. In short, factors that could keep inflation from easing towards the targeted 4 per cent mark as against the current 6.59 per cent level, are very much prevalent.

Therefore, the important takeaway is that a rate cut shouldn’t be assumed in the anvil anytime soon.

Nudge to banks

How can inflation be tamed? It’s a function of food and vegetable prices, crop availability, and rainfall distribution. But it is also a function of how money supply is channelised and curbed. Here’s where banks may play a part.

With incremental cash reserve ratio to be withdrawn from Saturday and the festival season around the corner, the RBI’s stated preference towards open market operations (OMOs) to manage liquidity may push banks to relook at their treasury operations. The Governor also made a case for banks to explore lending to inter-bank call money market rather than passively parking funds in the SDF or standing deposit facility. If both these liquidity management measures are seen in conjuncture, there seems to be a nudge towards better utilisation of funds rather than enjoying easy money.

Personal loans

Another highlight of the MPC commentary was the focus on personal loans. While there wasn’t much granularity on why personal loans aren’t  offering comfort to the regulator, the repeated reference to its faster growth vis-à-vis the other categories suggests that these low-hanging lending options, too, may be playing a part in inflation. Personal loans tend to be pure-consumption loans and don’t result in asset creation.

Usually, they include credit cards and unsecured small-ticket loans, and although these loans carry higher risk weights, their asset quality is not on par with secured products; usually 100-150 basis points higher than secured loans. There was an appeal to banks, asking them to relook at their approach towards these loans, including the risks involved.

Whether banks will go slow, given that the demand for personal loans tends to be the highest during festival season, will be interesting to watch.

Some liquidity-curbing measures should steer banks to rethink how they would want to deploy their funds. The question is how soon these efforts will reflect on the inflation numbers.

Long-term flows

The sooner, the better. Considering how the base rate between India and the US has steadily shrunk in the last year, for long-term forex flows into India, it may be imperative to widen the gap a bit. Right now, the flow of foreign money into India isn’t a problem. But much of it happens through the foreign portfolio channel and not as foreign direct investment, which is a more sustainable long-term option. For that to happen, rates must be more attractive as and when the avenues open. To tinker with rates, inflation should first come under check.

Therefore, while the MPC meeting may have been business as usual, its sharper thrust on inflation should be viewed seriously. Everything will depend on how soon and sustainably India touches the magic 4 per cent mark.

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