The Central Bank had started purchasing bonds in its open market operations, Central Bank Governor, Dr. Indrajit Coomaraswamy told the press following the monetary policy announcement on Friday. Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the Central Bank were left at their current levels of 7 percent and 8 percent, respectively.
The Central Bank has started providing liquidity support to standalone primary dealers. Coomaraswamy said “We have widened the scope of open market operations to include some liquid bonds. In the past, it was only treasury bills. Now it is some bonds, liquid ones.”
The governor gave arguments for relaxing policy. He said “Kristalina Georgieva has indicated that 90 percent of the countries in the world have slower growth this year. There is a perception that there is a synchronized slowdown in the global economy. That argues for some relaxation of monetary policy that gives us space for domestic policy action. Unlike in 2018 when the external environment was such that constrained the space for domestic policy action, now we have greater space.”
“We have an output gap. Growth is below the potential growth rate of 5 percent. The various forecasts for growth this year have been from 2.5 to 3 percent from various organizations. This argues for some relaxation of policy. Private sector growth which has slowed down significantly and I believe by the end of the year we see 5 percent credit growth. In an ideal world, we would like it to be between 10 and 15 percent. That argues for some relaxation.
“Similarly when you look at Monetary Aggregates say M2B, it is about 7.7 percent which again we think is below where it should be.”
The governor gave arguments for tightening policy. He said “In the short run there is likely to be an uptick in inflation. Food price inflation has gone up. Some of the factors there are the seasonal increases in fish prices and vegetable prices have also gone up. The Yala production was less than was anticipated. We had a very good Maha but the Yala was a bit less. This could put pressure on rice prices. Inflation rate is likely to go up to the upper bound of the inflation target of 4-6 percent. We need to be cautious. Clearly, in an inflation-targeting regime, the inflation target is the main target.”
“There has been some pressure on the rupees. It stabilized in the past few days. If it depreciates it would put pressure on prices. The statutory reserve ratio has been brought down by 200 basis points resulting in an infusion Rs 150 billion of permanent liquidity in the system. There have been 2 reductions in the policy rates. A factor that argues for tightening rates is the wage increases in the pipeline. You have seen that there are a number of pressures that have been brought forward in terms of wage increases. We need to wait and see how all that will bear out.”
Globally most central banks have reduced interest rates. The Reserve Bank of India has reduced interest rates to address the economic slowdown that India is facing.
There have been contractions in accommodation, food service, and transportation activities following the Easter Sunday attacks.
Economic growth is expected to be sluggish in 2019 and to recover in the medium term.
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