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Transmission of rate cuts improving; inflation spike factored in, says RBI Governor

RBI Governor Shaktikanta Das also said the inflationary impact of government spending as outlined in the Union Budget for 2020-21 won’t be much, adding the government has adhered to the principle of fiscal prudence.

By: ENS Economic Bureau | New Delhi |
February 16, 2020 1:07:36 am
rbi governor shaktikanta das budget 2020 rate cut On the impact of Budget on inflation, RBI Governor Shaktikanta Das said the escape clause used by the government is well within the parameters set by the FRBM committee. (File photo, source: Reuters)

The transmission of rate cuts has been “steadily improving” and is expected to improve further in the coming months, Reserve Bank of India Governor Shaktikanta Das said on Saturday. Das also said the inflationary impact of government spending as outlined in the Union Budget for 2020-21 won’t be much, adding the government has adhered to the principle of fiscal prudence.

“With regard to the impact of rate cut plateauing out, I would not entirely agree with that because transmission of rate cut has been steadily improving. If you recall, in December MPC when we met, the transmission to fresh rupee loans was in the order of about 49 basis points. In this monetary policy, we have said that it has improved to 69 basis points. It is the consequence of the rate cut, surplus liquidity that we ensure in the system and third, and very important, the external benchmarking which was brought into operation from October 1 onwards. Transmission is slowly and steadily improving and it should improve even more in the coming months,” Das said after the central board meeting where the Finance Minister addressed the board after the Budget.

Explained

RBI analysing MPC framework internally

As the term of the current monetary policy framework comes to an end in March next year, RBI Governor Shaktikanta Das said an internal review of its impact is being undertaken currently and, if required, the central bank will have a discussion with the government. Amid rising retail inflation levels, discussions regarding the medium-term target outlined in the monetary policy framework, which has been in operation for the past three-and-a-half years, will be closely watched.

The RBI has cut its policy rate by 135 basis points in the last one year. The RBI in its last monetary policy review meeting on February 6 maintained status quo on the key policy rates, citing growth-inflation dynamics. It had stated that the inflation was on a rising trajectory through the fourth quarter of 2019-20 and its outlook remains “highly uncertain.”

When asked if the RBI is relooking at the inflation target set in the Monetary Policy Framework, given the rising inflation, the RBI Governor said an internal review of the impact of Monetary Policy Framework is being undertaken currently within the RBI and if required, the central bank will have a discussion with the government. “Monetary policy framework has been in operation for the past 3.5 years. Internally we are reviewing, we are analysing how MPC framework has worked over the last three-and-a-half years. There is already an internal review process going on. At the appropriate time if required we will have dialogue and discussion with the government. At the moment, it is under review within the RBI,” he said.

As per the Monetary Policy Framework, the RBI’s medium-term target for consumer price index (CPI)-based inflation is 4 per cent, with a band of plus or minus 2 per cent. The central.government had notified the target for the period from August 5, 2016 to March 31, 2021, with the amended RBI Act providing for the inflation target to be set by the government of India, in consultation with the Reserve Bank, once in every five years.

On the impact of Budget on inflation, Das said the escape clause used by the government is well within the parameters set by the FRBM committee. “The direct inflationary impact of any Budget is fiscal deficit number, when borrowing goes up, but the government has adhered to the principle of fiscal prudence. The escape clause under FRBM Act, the deficit number in the current year as well as the next year are very much within the parameters set as per FRBM committee recommendations. The good part of the government borrowing is also budgeted to come from small savings. Therefore, I don’t see much of an inflationary impact,” he said.

The RBI Governor said declining crude prices has definitely a positive impact on inflation and it will not lead to a spike in inflation. “The main reason for spike in inflation is because of food inflation, mostly milk, fish, and various protein related items. Core inflation has slightly edged up because of revision of telecom tariffs, so therefore, I don’t see much of an impact (of Budget) on inflation,” he said.

CPI-based retail inflation surged to 7.59 per cent in January as against 7.35 per cent in December. The spike in retail inflation was stoked by higher price levels of food items such as vegetables, eggs, meat and fish and fuels. The MPC has sharply raised consumer price inflation projection to 6.5 per cent for the fourth quarter of fiscal year 2020 from 5.1-4.7 per cent earlier. The panel pegged CPI inflation for the first half of FY21 at 5.4-5.0 per cent compared with 4-3.8 per cent earlier.

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