How do you look at the commentary coming in from the RBI Governor Shaktikanta Das? He has stood with the government shoulder to shoulder to push growth.
I would say today’s RBI commentary is in line with the Budget and the policymakers’ common goal is all about growth at the moment. So the clear policy priority is to boost growth and that has come out in today’s policy. The repo rate has been kept unchanged. The biggest fear of the bond market is how the 12 trillion borrowing calendar is going to be met considering the market perception was that the liquidity policy normalisation has already kicked in.
RBI has said very clearly that the monetary policy stance as well as liquidity stance will continue to remain accommodative for a longer period. Even the CRR rate hike, which is just a withdrawal of the relaxation that was announced earlier. It looks like that RBI will be announcing OMO purchases to help smooth the bond market fears. From the growth perspective, RBI has mentioned 10.5% real GDP growth estimate for India for FY22. We are at 11.5% year- on-year growth and I guess there are more upsides than downsides at the moment on the GDP growth front alone.
On the inflation numbers, RBI came out with the numbers which are looking a little realistic at the moment because after lowering the March quarter inflation forecast, they have actually increased the first half inflation forecast from 4.8% average to somewhere around 5.1% average right now. I guess they are cognisant of the upside risk to inflation at the moment and that is not an India story. Globally, we are seeing the risk of inflationary pressures going up and that is something we need to be really mindful this year.
One last point to add, considering global liquidity continues to be quite supportive and at the same time, it looks like the government or RBI right now is not so keen on a quick liquidity policy normalisation considering the huge borrowing calendar which has to be met by continuous policy support. There is definitely the risk of easy liquidity conditions eventually leading to inflationary pressures building up with a lag. We need to be mindful of whether there are any upside risks to inflation than what RBI is talking about at the moment. But again, the wild card is always food and till the time food prices remain stable, maybe by better management of supply-demand dynamics, at least half of the inflation basket is under control.
One of the announcements made by the RBI Governor Shaktikanta Das is that retail investors can now invest directly into government securities both primary as well as secondary. What do you make of this announcement?
While it is a very good reform and financial markets are being deepened, the question remains whether there will be an appetite for it. It is a complete function of the gap between what the small saving deposit rate versus what the G-Sec yields are going to give you. Plus, there will be some kind of tax incentives up to a certain limit on investments in a small saving scheme. But I would say that from a medium-term perspective, the government is definitely diversifying the investment base of those who are the participants in retail or on the funding of the fiscal deficit and that is a good way. It may not be looking attractive in the next 12 to 18 months, but over a period of three to five years, if the government is able to develop and reduce the reliance on NSI funding, that can go a long way.
I would say it is the first step towards diversifying the investor base and deepening the financial markets. Again, I do not see too much of an impact or too much of a retail participation in the initial phases. As a household, if I have additional money to invest, I would prefer to invest in a security which is giving me the highest yields. So maybe a small saving scheme for which there is a strong affinity over the last so many years plus which has attractive interest rates might give me more solace than putting it in a RBI-led retail participation in a G-Sec market. But, from a medium-term perspective, it is definitely a good step in the right direction.
