Inflation expected to touch 3.8% in Q2 next year: Shaktikanta Das

There is a case for looking through the headline inflation, which is mainly due to the spike in food inflation. But our calculation shows that during the January to March 2020, within the headline inflation, food inflation is likely to remain very high, and its moderation in the coming months is dependent on several factors. And, with regard to core inflation, it is expected to remain in the current zone as it is below 4 per cent. But there is some evidence that certain decisions, let us say, relating to telecom (tariff) and other things, may play out and have some impact on core inflation.

So, it is expected that inflation will come to about 3.8 per cent in Q2 next year. But there are several uncertainties, and the MPC would like to have greater clarity with regard to that. So, let us also keep in mind the fact that inflation targetting/ price control is the objective of the RBI monetary policy, as prescribed in the (RBI) Act. And the RBI is also required to keep in mind the objective of growth, and that has been given due weightage. The MPC has, in fact, given a very clear and unambiguous guidance that there is space for further rate cut and the RBI will act if the evolving situation so warrants.

So, one aspect is greater clarity with regard to the inflation scenario playing out. We do expect it to moderate, but we would like to wait and pause at this juncture to see how it plays out. With regard to growth, we have seen some green shoots. Things are improving. But it is too premature and too early to assume or to take a view on how sustainable they are.

With regard to the Budget, it is not a question of worry that there will be more fiscal deficit or something like that. It is not at all a worry. In fact, I have gone to the extent of saying that in situations like this, when growth itself has fallen, the monetary and the fiscal authorities will continue to work together in greater co-ordination. So, therefore, we would like to have greater clarity (I’m not saying that we are worried) with regard to the kind and nature of the counter-cyclical fiscal and other measures, if any, to be announced by the government in the Budget. So, that will give us greater clarity.

The government has taken a number of steps in the last four to five months. For example, the corporate tax rate has been cut significantly. It is a major development. The government has also taken several measures to ease the problem and to generate demand in the automobile sector. The government has also announced its intention to set up a last-mile fund for the real estate sector, particular in the housing segment. The RBI, on its part, has reduced the policy rates consistently since February 2019. The liquidity has been in surplus mode since June. The full impact of our policy rate cut also is playing out. Till now, it is 44 basis points with regard to the new loans. We should give some time for the rate action, which has been taken by the RBI so far (135 basis points cumulative cut). We should allow some more time for the repo rate cuts to find greater reflection in the lending rates.

The MPC decided that at this junctureit is better to wait and take a temporary pause…During its February meeting, it will be probably better placed to take a call (on rates) when it has better clarity on all these points.

The timing of the rate cut is also very important to optimise its impact. We must cut when the impact will be maximum. Let the impact of 135 basis points cut play out even more. And when we reach a position, we time the next decision in a manner that as and when a rate cut is undertaken, considering that there is space available, the impact should be optimised and maximised. So, therefore, it is a question of timing also, which is very important rather than going on mechanically cutting rates on every occasion.

We should allow the measures already undertaken by the government and the RBI to play out. We should allow some more time.

On PMC bank, I have said earlier and would like to reiterate that there is a forensic audit underway. The final report is expected by month-end. Simultaneously, PMC bank, with the help of professional valuers, is trying to ascertain the value of assets mortgaged by the companies that have availed the loan. Also, other assets identified by EOW and ED, the PMC Bank and management team are ascertaining the realisable value of those assets. We have also set up a coordination team between PMC Bank administrator, the EoW, ED, and the RBI to monitor these things regularly and take steps for monetisation of these assets…Once we get the forensic auditor’s report and once we get a final number after assessment of the realisable assets, then a call will be taken for further course of action. The coordination mechanism will also work on monetising the assets and putting the money in the bank so that the bank will be able to get back whatever is due to it.

With regard to credit flow, we have taken regulatory measures in the past to ensure greater credit credit flow from the banks to NBFCs by increasing the single (party) exposure limits, permitted banks to lend to NBFCs for on-lending to certain categories of priority sector lending, among others. Now, the bank credit to NBFCs till the end of November has grown by about 26.5 per cent (it is, of course, lower than last year). We are constantly monitoring that.

With regard to the NBFCs, let me once again categorically say that the top 50 NBFCs are regularly monitored by the RBI by our supervision teams; in fact, much more closely and intensively than any one outside can expect. We are, wherever required, making a deep-dive into their books, into their balance sheet and other numbers. Roughly, these 50 NBFCs represent about 75 per cent of the asset size of the NBFCs. And we exactly know (we have fairly good idea) where the vulnerabilities lie, which are the NBFCs that are vulnerable, and we are monitoring them very intensively. The management/ promoters of these NBFCs are asked to come to the RBI at periodic intervals for discussions. We clearly tell them our expectations of the measures they should undertake to strengthen and get over their problems. The liquidity situation in NBFCs, at least for a period of three months, is being monitored. And the RBI, wherever necessary, will not hesitate to act to ensure that we do not allow any large or systemically important NBFC to collapse and produce any adverse or negative impact on the system. The RBI will intervene as and when required. The credit flow to the NBFC sector is slowly reviving. The better performing NBFCs are able to access funds from the market at pre-IL&FS rates. The market today is differentiating between the good and not so good NBFCs.

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