Tag: Latha Venkatesh

Here’s is how eminent economists review monetary policy framework of the RBI

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India (RBI) governor recently said that the monetary policy framework, the way in which interest rates are set is up for review.

It was in 2016 that the government and RBI entered into an agreement and the central bank said that it would keep inflation at 4 percent plus or minus 2 percent. Thus it formally became a flexible inflation targeting central bank. Again in 2016, monetary policy committee consisting of three external members and three members from the RBI was set up. The membership of the external members will end in September 2020. So, the agreement itself is up for review in March 2021.

Sonal Varma Chief India Economist at Nomura  and Samiran Chakraborty, Chief Economist at Citi, both members of the CNBC-TV18’s Citizens Monetary Policy Committee, in an interview with the channel reviewed the current framework.

Varma said, “It is definitely time to review, more in the sense of what are the learnings from the last say 4 years of flexible inflation targeting. On average inflation over the last 4 years has actually been about 4 percent and macros in general have been stable. Expectations have broadly been anchored. Indirectly, the regime has put pressure on the government also to keep its food, agriculture related policies and fiscal deficit under control.”

So, clearly there are things that have worked but there are learnings in terms of the nuances of the regime that require a review, said Varma.

She further added, “There are various aspects of the regime that need to be reviewed. First is, what should we target – should it actually continue to be headline inflation or should we target a variant of core? My view is that given the volatility in food prices, I would be more in the camp of targeting a variable that monetary policy can actually control through interest rates. There is also a case to be made to actually target the core.”

“Second is whether it should be 4 percent plus or minus 2 percent? Globally, we are moving in an environment of lower inflation, so I do not see any point in inflation in India actually moving in the other direction and hiking its inflation target. So, the target should remain 4 percent. But if you are targeting a variant of core then I don’t think India needs to have a plus or minus 2 percent kind of a band, a 1 percent variation should be okay,” she said.

“Third and more importantly, our communication with respect to the inflation target has been sort of one year ahead. We expect inflation to be sub 4 percent but these point estimates on inflation do not carry much value. Ultimately, it is really the average over a longer period horizon that matters a lot more and therefore the communication around the inflation target has to evolve into more — let us say a 12 month average of where we think inflation would be. So there are various nuances of the regime that needs to be tweaked on this framework.”

According to Chakraborty the inflation targeting framework has served us well over the last four years or so. So, there is no urgent need to change that framework because they may create an added layer of uncertainty if they are changed too frequently.

“We can do some minor changes here and there, but broadly since it has served its purpose of keeping inflation well anchored and giving some kind of stability to the system, I do not see a need to go back to the old multiple indicator approach,” said Chakraborty, adding that we should not forget that it is a flexible inflation targeting framework, so within itself it has the power to focus enough on growth.

“The Reserve Bank of India (RBI) has maintained that this is something which the core RBI keeps on looking at and so there is no reason for us to believe that financial stability will be sacrificed because of anything else,” he said.

Chakraborty further added, “The Standard Tinbergen Principle is that for one objective there should be one instrument. So, there is no need for us to think that we need several instruments for the same objective of inflation as long as the markets are more or less complete and there are less information asymmetries and less market fragmentation.”

According to him, the reason why probably some people are suggesting that the Monetary Policy Committee (MPC) should be empowered with more instruments is that our markets are often quite fragmented and right kind of signals don’t percolate through the system. For example, today this whole divergence between the M0 growth versus M3 growth, is happening because of a certain amount of risk aversion in the system. The reason why the transmission of rates are not happening is again because of market fragmentation.”

“Those are issues which are beyond the scope of the MPC framework and so they have to be dealt with separately. Once, we have a more developed financial system, then MPC should be able to give the right signals just through the repo rate and have enough control over the nominal anchor of inflation,” said Chakraborty.

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Former RBI Guv C Rangarajan bats for continuation of flexible inflation targeting regime

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The Reserve Bank of India (RBI) governor Shaktikanta Das last weekend caused quite a stir on bond street when he said,  “The monetary policy framework is in operation for the last three years. We are reviewing and analysing it internally as to how the MPC framework has worked. At an appropriate time, if required, we will have discussion with the government.”

In February 2015, RBI and government jointly signed a monetary policy framework, formally adopting an inflation target for RBI. The central bank was mandated to keep inflation at 4 percent, plus or minus 2 percent. This mandate was to be effective for 5 years: from 2016 to 2021.

In September 2016, the government appointed 3 external members and 3 RBI officials including the governor to form a monetary policy committee as required by the amended RBI Act. The term of the external members ends in September 2020.

The 5 year mandate to RBI to keep inflation between 2-6 percent ends in March 2021. Since both the mandate and the external member’s finish one term, the governor is right in ordering an internal review of how the monetary policy has worked under the inflation targeting mandate.

CNBC-TV18’s Latha Venkatesh spoke with former RBI governor C Rangarajan to review the working of the monetary policy framework.

When asked if India should persist with inflation targeting framework, Rangarajan said, “I believe in the Indian context and in the context of developing economies, there is a great deal of purpose behind a flexible inflation targeting scheme. In most of the countries in the world price stability is a dominant objective of the monetary policy.”

According to him, we need to make a distinction between the framework and how that framework should be operated. “As far as the framework is concerned I believe that the monetary policy framework of flexible inflation targeting is a suitable thing from the Indian context. Many people think that inflation targeting is a single objective motivated but that is not correct. Even the preamble says that the dominant objective is price stability keeping in mind the objective of growth.”

Therefore it is not as if that price stability takes precedence over everything. If one were to take a look at the minutes of the monetary policy committee meetings, it is very clear that the members are talking about what the rate of growth of the economy will be in the next few quarters and it is in that particular context that the inflation trajectory is also projected. So, one is not totally independent of the other. The flexibility that is being given is essentially to emphasize the fact that there are other considerations to take into account, he said.

“I personally think that 4 percent plus or minus 2 percent gives enough flexibility. Even if inflation as it is happening right now goes beyond the 6 percent, you need to act strongly only if the monetary policy committee thinks that the inflation will remain at that level for a long time. Therefore, we will need to keep that part of the mandate as it is,” he said.

As far as the implementation of the institutional arrangement is concerned, I think the word monetary policy committee (MPC) is a misnomer, it is not a monetary policy committee, it is a rate fixing committee. “I think they need to take a much larger view of not only acting on the policy rate but also are there things that can be done by monetary policy, I think that is very important if it is to be called a monetary policy committee”, Rangarajan added.

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Coronavirus impact on global markets is much bigger than SARS or 2008-09 financial crisis, says Jan Lambregts of Rabobank

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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Jan Lambregts of Rabobank on Tuesday said Coronavirus impact on global economy and markets is much bigger than SARS or the 2008-2009 financial crisis.

SARS was 17 years ago, it is a totally different situation now, he told CNBC-TV18. China was not as big, it wasn’t responsible for as much of contribution to world’s growth, he said.

“Secondly, in 2008-2009 crisis I do not remember too many coffee shops going closed then. So this is much more of an impact and so it is much bigger.”

“The second approach to think of it is that it is an extension of de- globalisation, it is extension of the trade war.”

“Just when the trade war took a step back with the phase 1 deal, this step makes companies again question where the supply chains are. So I think there will be more lasting damage but in part it will be offset by monetary policy and fiscal stimulus but there won’t be enough of that to go around and remember this is the most positive scenario.”

There is a lot of stimulus measures central banks still can take, governments can take but ultimately central banks are not in-charge of coming up with a vaccine or a cure for the Coronavirus, according to Lambregts.

“I do not deny that central bank money can offer a cushion but currently the markets are pricing something completely different, they think the peak is already behind us, this virus is contained and they are thinking I need to get on the bandwagon because all the stimulus is still coming in.”

“There only will be big stimulus if the scenario is not so good and in which case surely there must be some discounting from the record highs we are currently seeing.”

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Market opportunity is huge; can deliver growth across all businesses, says Axis Bank’s Amitabh Chaudhry

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The market share of Axis Bank is somewhere in the range of 4.5-5 percent on deposits and loans, said Amitabh Chaudhry, MD and CEO of the bank in an interaction with CNBC-TV18’s Latha Venkatesh.

Speaking about the growth drivers, he said, “I think the market opportunity is huge. So we can definitely deliver a growth across all our businesses, which is better than the market.”

On Indian economy he said, “The economic activity will take some time to pick up. Government has taken a lot of measures. Finance minister recently talked about some greenshoots but it will take time to go to a point where all of us can start saying that the growth is coming back,” he added.

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States stare at financial crunch, here’s what it means according to experts

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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In the Union Budget 2020 it was stated that the transfer estimates to states last year was at Rs 8.02 lakh crore, but actually what was transferred to states in the revised estimates is only Rs 6.56 lakh crore,, which is a shortfall of about Rs 1.5 lakh crore.

The first 9 months itself saw a 2.2 percent less transfer to states compared to FY19. However, if you looked at the math, the fall in the fourth quarter in terms of transfer to states will be at 14 percent compared to the fourth quarter of FY19 because the cash kitty of the Centre has gone down because of shortfall in tax collection.

In January-March of 2019 they got about Rs 2.7 lakh crore, according to ICRA estimates taken from the central government accounts. If you do the math, this quarter it is likely to be as bad as Rs 1.7 lakh crore and that is a fairly severe crunch.

Next year, the revised estimates say that whereas this year it is Rs 6.56 lakh crore transferred to states and next year it is going to be Rs 7.8 lakh crore.

However, this projected growth of 19.5 percent depends on the centre a total tax revenue growth of 12 percent and that is under unlikely because this year’s base itself is perhaps overstated at Rs 21.6 lakh crore and which they may not get going by the first 9 months of tax collection.

Therefore, there is likely to be a danger even to the Rs 7.8 lakh crore promised transfer next year.

Economist Haseeb Drabu said: “This is not the first time it has happened, in the pre-FRBM era this was a regular thing. The simplest administrative mechanism is you kind of postpone payments and the axe falls on capital expenditure because you can’t stop revenue expenditure. So, typically two things will happen, one, bills will pile up in the treasuries and capex will be cut.”

“What you are looking at now in this quarter is a liquidity crisis for the states but what you are staring down in next year is a proper fiscal crisis. So, this is bad time for state finances which have actually seen a good run over the last decade or so.”

Yamini Aiyar, president of Centre for Policy Research, said: “We are staring at an unprecedented liquidity crisis which is likely to take us towards a fiscal crisis.”

“What is particularly astonishing is that over the last 5-10 year’s state finances actually have done relatively better.”

“I would venture so far as to say they have done better than central government finances and now owing to the unpredictability and importantly the central government reneging on compensation for GST, you are creating complete unpredictability in state finances which is taking us into a very dangerous territory.”

Aiyar added that a significant part of the devolution to states comes in the form of tide schemes — centrally sponsored schemes which amount to 2 percent of GDP for this year.

“If you look closely at the release of money for these schemes you are looking at releases in the range of about 30 percent for some schemes, 50 percent for others up until December 2019.”

“So, this delay of release of money is snowballing into delayed payments at the ground level all the way down to the grass roots of expenditure and that is going to further crisis that we are going confront at the start of the next FY.”

Aditi Nayar, principal economist at ICRA, said: “Why the central tax devolution has been cut so sharply between the BE and RE of FY20 is really for two separate reasons. One is that the FY2019 provisional actuals were much lower than FY19 RE. So ever since we saw the FY19 provisional numbers, we have been worried about that.”

“Then on top of that once the corporate tax rate was cut, ever since September we have been highlighting that huge part of that is going to be shared with the states and therefore we have got two-fold concern. This will flow into next year as well. We are already worried that the FY20 RE are also overstated and therefore we are going to get a downward adjustment in FY21 as well.”

According to Thomas Isaac, finance minister of Kerala: “Normally towards the end of the financial year you would be getting a much bigger support than the normal monthly support from the central transfer. Now, with the shortfall in the revenue the opposite is going to happen.”

“For the state of Kerala, we are expecting that our central tax share would decline at least by Rs 20,00 crore which is a big shortfall.”

All states are going to face this shortfall and this is primarily because of the large concessions given to the corporate tax, he said.

In fact no corporates were asking for tax concession, he added. “So I do not know for what reason this corporate tax cut was announced in this hurry.”

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Equity markets will be tested if interest rates surge, says American economist Carmen Reinhart

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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“Protectionism and populism tend to surface most when the pie stops growing” — that’s the word coming in from American economist Carmen Reinhart.

Reinhart told CNBC-TV18 that part of the equity market story is tied to the exceptionally low interest rates.

“There is a search for yields. Some of the reasons that interest rates are low have to do with ageing population, some of them have to do with lower productivity and some of these trends to lower interest rates.”

However, one has to be prepared to the extent that some of the interest rate decline is not permanent, that there could be adverse shocks, inflation surprises and the like that would lead to some increase in interest rates, he added.

“I think those equity markets will be sorely tested because right now I think there is a great deal of complacency that inflation is dead and rates are low forever and that in economics is always dangerous.”

In an exclusive conversation with CNBC-TV18’s Latha Venkatesh at India Risk Management Awards 2020, Reinhart also talked about the surge in global market despite rising government debt levels.

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Fall in household savings not a worry as of now, says former chief statician Pronab Sen

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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India’s net household financial savings growth rate has fallen to the lowest in eight years at 6.5 percent according to the latest data released by the National Statistics Office (NSO).

The data states gross savings have dropped in absolute terms from 20 trillion in FY18 to 19.9 trillion in FY19. CNBC-TV18’s Latha Venkatesh explains the numbers and later former chief statistician Dr Pronab Sen shared his views on the same.

India’s total household savings have fallen in aggregate terms from 20 trillion in FY18 to 19.9 trillion. From the gross, if you deduct household liability – that is loans taken by households – you get net savings and that has dropped to 6.5 percent of gross domestic product (GDP). When the new base year started, our percentage of household savings to GDP used to be at 9 percent and before that 11 percent but then the methodology changes and we were at 9. Now we have dropped to 6.5 percent, so that is a little worrisome.

Net savings have dropped because gross has dropped. It has also fallen because households are taking more loans. The liabilities or loans could have grown because of MUDRA and because banks are pushing a lot of retail credit. Now because corporates are not borrowing, there is a lot of retail credit borrowing and that is another reason why you are seeing a lot of fall in net household savings.

There are also methodology issues in this. Reserve Bank of India (RBI) used to publish both savings and investment data and NSO also used to publish – the two numbers didn’t match because NSO was not including enough of mutual fund (MF) and insurance data. Now the two institutions have got together and cleaned up the data. So, there is no disputing this data that our net household savings has genuinely fallen.

Dr Sen said “You have to keep in mind that 2017-2018 was a very unusual year, the post-demonetisation year. In that year, the gross savings went up because all of us simply transferred our tax reserves into the banking system. If you look at the data – what you find is in 2017-2018, the gross savings of households went up by more than Rs 4 lakh crore, while the trend was of Rs 1-1.5 lakh crore So there was a huge bump up, almost four times bump up in 2017-2018. Some of that has corrected. So, if you look at the trend, in fact we are above trend as of now,” Pronab Sen said.

“As far as household savings are concerned they have not fallen. What has fallen is corporate savings are down and government savings are down. So far as households are concerned, if you leave out 2017-2018 – which was an unusual year – there has been no fall in savings. The real issue is that household sector which includes unincorporated businesses are borrowing more, which is a good thing. So, I wouldn’t worry too much about it as of now,” he added.

When asked if the new tax regime would have any impact on the savings rate, he further mentioned, “If you look at what is happening to the savings behaviour of households, small savings weren’t doing very much until the banking crisis erupted and then suddenly small savings took a spurt. In the last couple of year’s small savings have gone up by over 20 percent a year. What it means in effect is that the large corpus in small savings is essentially a result of lack of confidence in the banking sector or in the MF sector.”

“Whether the change in income tax rate is going to lead to a shift in behaviour is very difficult to say because we really don’t know what is driving it. I don’t think we need to worry too much about the savings at the moment because in India most household savings are not that sensitive to interest rates. What they are sensitive to is people’s expectations about the future.”

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow

Budget 2020: Huge dependence on privatisation, small savings to keep govt borrowings within limit, says Neeraj Gambhir of Axis Bank

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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The biggest problem with finance minister Nirmala Sitharaman’s maiden Budget last June was the outlandish assumptions on growth and tax collections. Has she managed course correction with her second Budget? Are the growth and tax assumptions more realistic?

The Fiscal Responsibility and Budget Management (FRBM) escape clause has been triggered. Even then can the fiscal math be convincing enough to keep the rating agencies at bay? How will bond markets react to the government’s pledge to borrow a little less than expectations? And finally– taxes — can the income tax cut for people under Rs 15 lakh boost consumption? Is the hike in customs duties across several household appliances and other items a self-goal?

Prachi Mishra, chief India economist at Goldman Sachs, said:  “As macro economists what we look for is fiscal stimulus. So, fiscal stimulus is defined as change in consolidated Budget deficit which includes Centre, states and any outside public sector enterprises.

“Our calculation suggests that for FY20 centre, states and central public sector enterprises because we do not have any idea about how much borrowing state public sector enterprises are doing, it is a whopping 8.8 percent of GDP, up from 8 percent of GDP. So, there is a 0.8 percentage point fiscal stimulus in the budget if you take a consolidated view.”

Neeraj Gambhir, president, head treasury & markets at Axis Bank, said: “The first reaction of the bond market would be a sigh of relief because there was this worry that you could actually be more than 3.8 percent for this year itself and that could entail somewhere between Rs 30,000 to Rs 50,000 crore of additional borrowings by the government in the debt securities market, that has not been the case.”

Also for next year 3.5 percent headline Budget deficit number is a bit of a relief for the market. So, he expects the markets to open with a bit of a positive note on Monday.

On financing of the Budget deficit, Gambhir said this year there was a big pick up in the small savings, about Rs 1 trillion, so it was Rs 2.4 trillion as against Rs 1.3-1.4 trillion, so that pick up in small savings helped the government contain its market borrowing program.

They have assumed a similar number of Rs 2.4 trillion for the next year. So on the one hand, from the receipts point of view there is huge dependence on the privatisation program, there is also a huge dependence on small savings as high as it was this year to make sure that the overall government borrowing program stays within the limit that they have actually talked about which is Rs 5.3 lakh crore net, he said.

So, this is something that the market has to watch out for rest of the year, added Gambhir .

Maitreesh Ghatak, professor – economics at LSE, said the tax cuts have been pointing out that given the complexities of the change how effective the tax cut will be in terms of who qualifies etc.

“Leaving that issue aside just to give you a kind of provocative piece of arithmetic, suppose we waived entire personal income tax, suppose we just cut income taxes totally, how much of GDP will be affected? It is 2.5 percent.”

“Therefore, if we think of the aggregate economy and the size of a stimulus that would be needed to put it out of the current slowdown, income tax cuts are not really very serious ways to go about it not just for the quantitative amount because whatever else you do it will not be huge percentage of the GDP.”

“But, for the second reason that this will affect the relatively better to do people whose propensity to consume is not as high.”

“Whereas if you think about it, 50 percent of national income comes from the unorganised sector and if you think about all the consumption related statistics that are coming out of NSS and other recent studies that is where there has been a decrease, according to some the NSS or a significant slowdown and I don’t see how income tax cuts are going to affect 50 percent source of the GDP or where 85 percent of the population is engaged and how that will boost the demand for mass consumption items I really don’t see it.”

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow