The Growth Vs. Inflation conundrum
The Reserve Bank of India (RBI) may prioritise growth over inflationary fears in its April, 2022 policy
Reserve Bank of India Governor Shaktikanta Das has reassured industry that the central bank will not make a hard landing on liquidity and will ensure that credit does not dry up as it works to restore the economy amid rising energy prices. This should give financial markets some peace of mind given that central banks in industrialised economies are reigning in their pandemic-induced cheap money policies in order to combat inflation that has reached levels not seen in decades.
Within weeks of the Indian government announcing an increase in borrowings to fuel infrastructure-led growth, the RBI maintained its supportive monetary stance in a policy review. In particular, due to higher-than-expected vegetable costs in February, the consumer price index (CPI) inflation print has stayed excessive. Earlier this month, CPI inflation came in at an eight-month high of 6.1 per cent YoY in February 2022. Besides, food inflation came in at a 15-month high of 5.8 per cent YoY in February 2022 versus 5.4 per cent YoY a month ago.
The RBI Governor’s accommodative stance, although considered as being behind the curve by certain quarters, is despite the fact that energy prices have risen since Russia began war on Ukraine. The notion that India will not have import energy inflation on the same scale of Europe or the United States underlines this belief. India is still trailing in capacity utilisation and its energy intensity is lower. Manufacturing drives inflation, and the RBI is fine with the consumer price index (CPI) occasionally jumping above the policy band due to Russian supply interruptions.
The gradual pass-through of crude oil and natural gas prices to retail customers of automobile fuels and cooking gas could suggest policymakers’ confidence in the global energy supply disruptions being limited. Stagflation caused by an oil shock, according to the Governor, is non-existent in India. However, the supply chain’s second-order consequences will continue to be a source of concern
During the February monetary policy review meeting, the Governor anchored the inflationary expectations and In the review in April, it is expected to continue to do so. The Governor’s pledge that policy reversal will be measured and communicated in advance should comfort the markets.
Indian Interest rates rising slower, but soon to pick up pace
Interest rates and Government Bonds yields are rising in most economies around the world, but the rise in India has been more moderate than in established markets like the US. The 10-year Government of India bond yield has risen by 37 basis points year to date from 6.45 percent at the end of December 2021. The benchmark bond yields in the United States have increased by 87 basis points over the same period. This moderate increase in rates in India is majorly due to the recent actions of the Reserve Bank of India. After rates soared following the Budget announcements, the RBI calmed down the bond market. It cancelled two bond auctions and the Union Government hasn’t taken out any new market borrowing in nearly two months. The interest rates had further cooled slightly with support from the RBI’s dovish monetary policy in early February.
On the other hand, it is believed that the relative standstill in bond yields /interest rates in India would not stay long. Interest rates in most large economies have moved up. India’s yields are projected to climb up in the coming months particularly in the new fiscal year 2022-23. It is expected that the 10-year G-Sec yield will rise to above 7.20 percent by March 2023.
Factors such as an anticipated rise in inflation due to increasing commodity prices, as well as more rate hikes by the US Federal Reserve and the European Central Bank, might push interest rates higher. In India, Interest rates are determined by a variety of factors, including inflation, bank credit-to-deposit ratios, changes in the RBI’s foreign exchange holdings, and the global interest rate trajectory.
Many had thought Russia would conquer Ukraine within 10-15 days, but it has been a month since the war began. It still isn’t clear how long it will take for peace to resume in the region even as Ukraine president Volodymyr Zelenskiy has made it clear that the country will not join the North Atlantic Treaty Organization (NATO).
A feeble impact is already being felt, and if the conflict stretches way beyond March, it could have implications on growth, inflation, fiscal deficit and current account deficit.
NBFC and MicroFinance Updates
NBFCs seek extension of subsidy under PM Housing for two years
The Cabinet had recently approved the extension of the Pradhan Mantri Awas Yojana ( PMAY) Gramin scheme beyond March 2021 to March 2024 to achieve the total target of 29.5 million rural homes. The extension only allows subsidies to the remaining 15.575 million households within the overall target.
Non-bank financing companies have approached the central housing ministry seeking clarity on its stance on continuing fresh disbursals under the PMAY Credit Linked Subsidy Scheme (CLSS) for the poor and the underprivileged.
Banks lose microloan market share
The loss in market share took place even before the RBI liberalised rules on lending to this sector — lifting the cap on interest rates charged. The new rules are expected to enable NBFC-MFIs to be more competitive and gain market share.
Microfinance : New Regulations
The rules announced by the Reserve Bank of India broaden the definition of micro loans, impose uniform regulations on NBFCs and other entities extending microfinance, and do away with the rigid pricing and exposure caps that today deny many small borrowers access to credit.
