What is your sense of the path that the governor had laid out in terms of what the normalisation process is going to look like?
It is a somewhat predictable path in the sense that it was expected to start with not really liquidity reduction but rather not adding more and more liquidity to the system and hence stopping the GSAP. Although the VRRR is construed often as a liquidity absorption measure, it simply changes the duration of banks’ holding of liquidity with the RBI. So it really is in a sense not liquidity reduction although the market initially construes this as some kind of liquidity normalisation.
As and when there is a need either to add liquidity or offer banks a longer duration for parking their funds, RBI is willing to come forward. So it starts with liquidity, very gradual easing off of liquidity infusion starting with the GSAP, nothing on rates, pretty much on expected lines. So to quote the governor, “not to rock the boat.” Whatever the RBI does next will be contingent on how things pan out. Logically I think the next step would be to actually reduce the quantum of liquidity and then think of reducing the corridor and then a rate lift off. But it is very clear from the commentary that the RBI still sees growth as the biggest challenge. It sees a risk still persisting including another wave of Covid which is not off the table as far as the RBI is concerned. As of now, the risks are evenly balanced.
How hopeful are you that we are going to see a big demand pick up? Do you see secular demand in times to come?
It depends on what you mean by a sharp pickup. Sequentially, there will be a sharp pick up. But the governor emphasised that we are kind of still below pre-Covid levels. Sectorally capacity utilisation might have increased but it is still fairly low. So just to get back to a pre-Covid level would take perhaps still the first quarter of the next calendar year.
So growth is recovering but it is a long battle ahead and as I would tend to agree with the governor that although there has been some stickiness and elevation in core inflation, one can clearly identify categories where supply plays a huge role and remember one point that he made which is very critical that inflation can be brought down if fuel taxes are adjusted.
In the presence of so many of these supply factors, to question the RBI for not paying adequate attention to inflation when growth is still iffy and there are various risks around the horizon, is a little unfair. I think this was good policy and we have sensitised the market to this notion of a glide path for inflation, for non-destructive policy measures. Anything apart from this would have been disruptive not just for the markets but also for the economy.
This is sensible policy making in response to a catastrophic event. Just because you have just come out of the worst phase of the catastrophe does not mean that you will suddenly jump up and change your policy stance and your approach to economic management immediately or do a U-turn. So I think this is sensible.
Whenever we look at growth — be it festival season — certainly things are going to pick up but remember the fact that we are still behind pre-Covid levels and we are way behind the kind of trend path that would have prevailed had Covid not happened. So that just gives you an idea of how difficult the challenge still remains. It is not over. We might be out of the worst phase of the crisis but there is a long way to go and I thought the metaphor that the governor used was rather appropriate that “we do not want to rock the boat but once you get to the shore, there is a long walk ahead.” That long walk in my understanding indicates getting back to the pre-pandemic trend path and if you just look at the numbers you will realise how difficult a challenge it is.
So durable growth which comes close to that level is difficult to achieve and we need all the help from the policy side that we can get, fiscal policy has fallen a little behind. I am so glad that monetary policy is trying to compensate and push this forward.