But RBI Governor Shaktikanta Das and Deputy Governor Michael Patra raised more questions than answers on Friday.
Das was repeatedly asked at a press conference as to why the central bank has taken the step of increasing liquidity withdrawal operations – variable rate reverse repos — from Rs 2 lakh crore to Rs 4 lakh crore.
Early July, Das gave interviews to newspapers claiming that growth takes the biggest priority. He reiterated the same today. But actions speak more than words. CPI inflation forecast for FY22 has been increased by 60 bps, while the size of liquidity withdrawal operations have been raised from Rs 2 lakh crore to Rs 4 lakh crore in phases.
These are diametrically opposite actions from the views given by Das in recent interviews. After Friday’s policy, one can’t help but wonder if those views were aimed at soothing markets while being personally aware of a harsher reality.
Almost every question on liquidity management operations was deflected to Dr Patra, the DG in charge on monetary policy. His responses primarily focused on average inflation expectations in a pandemic year.
If inflation is indeed transient, as RBI claims, why has one-year ahead CPI forecast been raised by 60 basis points?
Inflation data was available to RBI when Governor Das gave interviews to leading newspapers, saying that any abrupt withdrawal of easy money policy would negate gains for the economy.
But Friday’s policy was a hawkish statement disguised as a dovish statement. The devil lies in the details and markets — entities (unlike the central bank) which have profit margins – suffer from central bank equivocation.
No matter how much the emphasis on growth is, one cannot ignore the fact that RBI’s CPI inflation forecast is now at a level, which is 170 basis points above the mandate given under the MPC Act.
Das also said today that he is not certain if a third wave of Covid will occur. The takeaway of that is that RBI’s focus is now again on inflation.
RBI spent the best part of last year coaxing, cajoling, forcing the 10-year bond yield to be at 6 per cent, even when market conditions clearly did not warrant it.
Over the last two years, the bond market will have absorbed close to Rs 40 lakh crore of gross bond supply if one takes into account both state and central government bonds.
In comparison, RBI has so far announced around Rs 2 lakh crore of bond purchases. That means interest rates will not come down anytime soon. If anything, interest rates are likely to head upward as RBI’s mandate of controlling inflation has been severely compromised.
These steps put RBI’s credibility at serious risk in terms of market communication, and it has to accept that markets ultimately are driven by investment decisions.
