A bitter pill for savers, pensioners

So the long-awaited policy — the first policy from a newly set up and newly constituted Monetary Policy Committee, the first policy of the new Reserve Bank of India governor — has come and gone.

It has left most people happy — except perhaps savers and pensioners — who may still not be aware of the implications for them.

If they did, they should not like the sound of that neutral rate being moved down by 25 bps to 125 bps.

The lower than expected August CPI at 5.05 per cent, the good monsoon, reports of higher sowing, softening of food inflation, and the lower global outlook for growth after Brexit, provided some space to cut rates marginally and the newly constituted MPC took advantage of this.

At the same time, the MPC statement alluded to the rise in inflationary expectations in the September survey, rise in input costs and the upside risk to inflation on account of potential cost push pressures that may emerge, including the 7th Pay Commission award on house rent allowances, and the increase in minimum wages with possible spillovers through minimum support prices.

Given that the MPC took the decision to cut rates by 25 bps despite the outlook for inflation being at the upper range of the target band and the potential risks to inflation requiring vigilance, what this implies is that it is left with very little space for any further interest rate cuts.

The accommodative stance of policy is quite evident when we see that repo rates have fallen by 175 bps to the lowest in six years and observe the extent of liquidity injected during the current financial year.

No wonder one of the analysts who was interviewed on TV said he was shocked by the policy — as his reading of the statement perhaps clearly ruled out further cuts.

The worrying aspect that came out in the press interaction following the policy is the feeling that perhaps the RBI has lowered its view on neutral real policy rates to 125 bps. The former governor, Raghuram Rajan, in his talk on the 10th Statistics Day Conference in Mumbai, showed a chart plotting real policy rates around the world.

He said, “Given our real growth is amongst the highest in the world, while our inflation is in the upper tier, one would expect our real policy rate to be high. Instead, it is right in the middle of the pack of large countries, and significantly lower than China, a country we often like to compare ourselves with.”

Clearly, therefore, the most important takeaway of this policy from the new MPC and the new governor is that there seems to be a change in stance regarding the neutral policy rate.

The justification given in the press interaction, comparing our rate with advanced countries and not with China or Mexico is one-sided.

This change in stance — if interpreted correctly — does not augur well for savers and pensioners.

Part B of the policy statement relates to developmental and regulatory policies that are outside the remit of the MPC and represents RBI policies. Most of what has been announced represents continuation of works in progress.

Two points deserve to be highlighted. The first relates to the “Scheme for Sustainable Structuring of Stressed Assets’ (S4A) introduced in January 2016 that provides an avenue for reworking the financial structure of entities facing genuine difficulties and requiring coordinated deep financial restructuring.

The RBI has decided to allow that portion of debt determined to be sustainable to be treated as a standard asset in all cases, subject to certain conditions.

This is a double-edged sword as sustainability of a debt depends critically on the assumptions of future cash flows, which are quite uncertain.

The provisioning requirement depends on assessment of fair value that is also quite nebulous. In the circumstances, allowing the standard asset classification in such cases where there is no change in promoter could turn out to be risky, and individual large cases may be required to be subjected to supervisory oversight. It is hoped that when the final guidelines are issued, there would be a mention of such oversight.

The other measure relates to allowing the overseas parent or the central treasury to hedge the current account exposures of the Indian subsidiary arising out of trade transactions involving exports from and imports into India, invoiced in Indian rupees.

While this is welcome as a measure of promoting invoicing in rupees, it is not clear whether this means allowing the internationalisation of the Indian rupee. It is also hoped that this facility will not be misused to take speculative positions on the Indian rupee and the final guidelines will clarify the position.

To sum up, the MPC has taken the opportunity to make everyone happy — except the silent bank depositor. Its credibility will depend on its stance when risks to inflation are increasing and it is hoped the academics will rise to the occasion when that happens.

The writer is former deputy governor of the RBI. This article is syndicated by The Billion Press

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