Growth decelerating to 5% a surprise, reviving the economy is the top priority- RBI Governor

Dated 19th September 2019

Updates on the market: The stock market traded higher to close the day 0.2% higher at 10,840. This was largely on the back of 5% fall in the price of crude oil, after the historic spike in oil prices following the drone attacks on Aramco’s oil supply. Saudi’s Energy Minister Prince Abdulaziz bin Salman said that 50% of production has already been restored, the Kingdom expects to be at full capacity by the end of September. There is speculation that the Indian government is ready with the 4^th fiscal package to boost the economy. This coupled with the fall in crude prices helped the market stay in the positive territory. Among the sectoral indices, Realty (1.5%), Metals (1.1%) and PSU banks (1%) led the index higher. Media (-0.4%), Pharma (-0.1%) and Auto (-0.1%) were the laggards. Within the Nifty stocks, Tata steel (3.7%), BPCL (3.6%) and Vedanta (3.2%) carried the index higher whereas Britannia (-2.9%), Indiabulls Hsg (-2.8%) and Coal India (-2.6%) declined.

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Growth decelerating to 5% a surprise, reviving the economy is the top priority- RBI Governor

Excerpts from an interview with Mr Shaktikanta Das, Governor of the Reserve Bank of India (RBI), printed in Mint dated 17^th September 2019

·        Saudi oil production represents roughly about 10% of the world oil production and supply. Roughly 50% of that, which means around 5% of the total global output, is affected because of the drone strikes on the Aramco oil installations. This has impacted the crude prices, which in turn impacted the Indian currency. Depending on how it persists, it will have some impact on the Current Account Deficit. If it lasts longer, it will also have implications on the Fiscal deficit.

·        About the current inflation numbers, he mentioned that food prices are cyclical within a year. There are months when the food prices, particularly the vegetable prices or fruit prices, tend to be higher and then they soften.

·        He was asked about the reasons for having high inflation in urban areas compared to rural areas. He said that urban price inflation is mostly because of the prices of egg, milk, etc. have increased. In rural sector, not much of milk purchase happens. Milk purchase is mostly in the urban sector. Milk prices have gone up across states and in a few more states it is yet to go up. So it is things such as the prices of eggs, milk are impacting urban inflation.

·        In August, RBI worked on the GDP (Gross Domestic Product) number of 6.9% with the downside risk. Especially in the first quarter, they had projected a 5.8% growth in GDP. The actual number of 5% came as a surprise to the apex bank.

·        To revive the economy, he added that all stakeholders, all policymakers, including the private sector players have to play their part. Just monetary policy cannot play its role. However, so far as monetary policy is concerned, they have already articulated growth is a matter of priority.

·        The RBI has given 35 bps rate cut in the last policy. Since then, the 10-year yield is standing at 6.7%. He was asked why the yields have not fallen in line with a rate cut. He answered that this has happened due to international factors. The benchmark yield has gone up 8-9 bps because of the airstrike on Saudi oil facilities.  Especially in last one month, every round of increase in yield by few basis points is linked to an international event. Domestically, nothing different has happened to expect the first-quarter numbers came some time ago.

·        The RBI does not have any specific target for the Rupee. The bank’s role is to manage the volatility of the exchange rate.

·        There is speculation that the owners of Paytm bank may take a stake in Yes bank. He said that under universal banking, anybody can apply for a banking license. RBI has certain criteria. Whoever it is, if he passes the criteria he will get a banking licence.

·        About the weakness in the private sector banks, he mentioned that there are strengths and weaknesses in both public and private sector bank and as the regulator and as the supervisor of the banking sector, they are aware of what is going on in various banks and it is very closely monitored by RBI.

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