“The policy objective of the MPC
is to maintain price stability, keeping in mind the objective of growth. Today, when we see that price stability is maintained, and our inflation is well below 4 per cent and expected to be slow in the next 12-month horizon, there is room for a rate cut, especially when growth has slowed down,” said Das on Thursday.
But the government might not be in a situation to give a fiscal push, the governor indicated. However, he said the decision on this would be taken by the monetary policy committee when they meet in October.
“Within the policy framework the MPC
will consider these aspects as well as several other factors including the assessment of growth and inflation projections. The final decision will be taken in the ensuing MPC meetings in October 2019,”
“Government’s fiscal space itself is quite limited. The fiscal deficit is at 3.3 per cent (of the GDP). There is a lot of talk about public sector borrowings by the government so both put together there is very little fiscal space for the government,” Das said. Whatever measures announced by the government don’t upset the fiscal math, according to the RBI governor.
“The government has remained prudent as they have not announced any counter-cyclical measures in terms of fiscal expansion. They have taken some administrative measure with regards to automobile, export, and banking sectors. And most of these don’t have a fiscal pressure,” Das said.
In his speech, Das said rupee was fairly valued, even by standards laid out by the International Monetary Fund (IMF), which sees zero gap between the rupee’s exchange rate and the real effective exchange rate (REER, which measures the rupee’s relative strength against a basket of currencies).
“India’s exchange rate regime is flexible and market-driven, with the exchange rate being determined by the forces of demand and supply. The RBI has no target or band for the level of the exchange rate. Interventions are intended to manage undue volatility,” Das said in his speech, even as he concluded that heightened volatility in the exchange rate in the past two years has been because of global spillovers. Bond yields have been going up too because of external factors, and the universe of negative yielding bonds is growing disconcertingly large, posing a potential threat to financial stability,” he said in his speech.
The US Federal Reserve’s rate cut by 25 basis points would attract more capital in emerging markets such as India, even as the Saudi Arabia crisis would unlikely fan inflation in India, the governor said. But the volatile international crude prices continue to pose potential risks to the viability of the current account balance through trade and remittances channels.
India’s macroeconomic fundamentals are strong, current account deficit is low, and the country is one of the least externally indebted countries in the world. The US-China trade war could be to the advantage of India. India’s demography would continue to favour the nation till 2055.
“In this milieu, prudent external sector management with a close and continuous vigil on areas of external vulnerability assumes critical importance and will continue to receive RBI’s close attention,” he said.
The outlook for India’s external sector is one of cautious optimism, albeit with some downside risks accentuated at this juncture. “Among them, deepening of the global slowdown and escalation of trade and geopolitical tensions appear to be the most significant,” Das said.
“The search for new export markets and new niches must go on so as to reap the benefits of changing dynamics of global value chains. Indian IT companies need to accelerate market diversification and invest in new skills and technologies to hone their comparative advantage.”
Remittances and non-resident deposits are likely to remain shock-absorbers over the medium term and need to be assiduously cultivated, including by ease of remitting and reducing transaction costs, Das said. “Ultimately, the strength of the external sector derives from domestic macro-fundamentals. Investors and markets need to be credibly assured of our ability to maintain macroeconomic and financial stability through continued focus on these areas,” Das said.