In a rare interview last Friday, Reserve Bank of India Governor Urjit Patel emphasised the need to ensure that the hard earned gains of macro-economic stability was maintained in order to withstand the global financial volatility. His explanation regarding the change of stance of the central bank was well-timed.
Under his governorship since September last, senior RBI officials have significantly reduced communication through the media. In the absence of any guidance, the central bank had managed to surprise the economists and the market in each of the last three policy meetings. According to a Reuters analysis, Patel gave only nine public speeches or press conferences in first five months of his governorship including one on the disruptive period of demonetisation.
In comparison, D Subbarao, who took over in 2008 at the start of the global financial crisis, spoke 16 times and Raghuram Rajan who started in 2013 amid rupee crisis, spoke 20 times during the same period. Previously, these media interactions were used to ease investors’ concerns and guide the market.
Under the amended RBI Act, the monetary policy decisions are taken by the six member MPC (Monetary Policy Committee) and not by the governor with the help of Technical Advisory Committee. Most probably, the communication strategy of the MPC members needs to evolve over time. None of the MPC members have yet spoken publicly. The absence of communication had increased the volatility in the market.
The monetary policy decision to maintain status quo on February 8 was a surprise because there was an expectation that the RBI might decide to front load its rate cut as the window of opportunity was closing very fast. The backdrop was also just right. India’s growth which was already weak, further slowed after demonetisation.
Investments are yet to pick up and bank credit growth remains muted. Inflation, particularly Consumer Price Index (CPI), softened on falling food-grain and vegetable prices. The government announced a prudent budget with only incremental increase in fiscal deficit to 3.2% of GDP vs the target of 3%. Quality of spending also improved in the Budget.
Source – https://www.deccanherald.com/content/597928/external-factors-limit-possibility-rate.html