June 18th 2024.
The Reserve Bank Governor, Shaktikanta Das, addressed concerns about changing the policy stance in a recent speech at broadcaster ET Now's Leadership Dialogues in Mumbai. He stated that it is currently too early to make any shifts and emphasized the need to avoid taking any risky actions with interest rates due to the pressure from food inflation.
During the meeting of the six-member monetary policy committee, one member did vote for a change in policy stance from "withdrawal of accommodation" to "neutral", but Das reiterated that it is still too soon to consider such a change. He stressed the importance of staying the course and not engaging in any form of adventurism at this point in time.
Das acknowledged that there is a growing desire to change the policy stance, but the RBI is looking for clear evidence that inflation is decreasing at a faster rate. He explained that while inflation has decreased recently, it could still reach 5% in the near future due to various pressures. Food inflation, in particular, has remained high at over 8% in recent readings, and external factors such as rising international metal prices and global food price index are also contributing to inflationary pressures.
The Governor also reiterated that the last mile of inflation is the most difficult to tackle, as it tends to stick around for a longer period of time. While the RBI is confident that inflation will continue to decrease, it will do so at a slow pace. This slow progress is due to stubborn food inflation, and if the downward trend is to be accelerated, sacrifices may have to be made on the growth front.
On the topic of economic growth, Das shared that internal analysis by the RBI suggests that the April-June quarter's growth will exceed the estimated 7.3%. He also expressed confidence in meeting the RBI's projection of 7.2% for the fiscal year 2025. He noted that last year, the RBI's projections were deemed too optimistic, but the economy performed better than expected.
Factors such as a pickup in rural demand following a favorable monsoon prediction, steady urban demand due to the services sector's growth, and an increase in private sector investments all contribute to the RBI's optimistic outlook on economic growth.
In regards to concerns about private capex, Das explained that corporate balance sheets show an increase in fixed assets, as companies are now investing their cash reserves instead of deleveraging as they did during the Covid period.
The Governor also addressed the high retail participation in the riskier futures and options trade and acknowledged that the volumes have exceeded the GDP. He reassured that the RBI is monitoring the situation along with the Securities and Exchange Board of India (SEBI). Any necessary action will be taken by the capital markets regulator, and an early warning group is keeping an eye on the situation to ensure financial stability.
On the topic of real estate, Das stated that there is currently no cause for concern. The data shows an increased presence of banks in the sector, but this is due to the HDFC twins' merger last July.
Finally, addressing the current account deficit for the March quarter, which will be announced next week, Das mentioned the possibility of it being lower than the 1.2% recorded for the first nine months of FY24. He also assured that the RBI will continue to build reserves to mitigate potential volatilities in the future, including diversifying their reserve holdings with gold.
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