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RBI WATCH

Das' new real interest rate policy - don't tell anyone!

 

Cogencis, Friday, Jun 7

By Siddharth Upasani

Much before the government and the Reserve Bank of India agreed upon a flexible inflation-targeting framework, then governor Raghuram Rajan provided a thumb rule for what the real rate of interest should be. He might not have followed his 1.5-2.0% guidance to the T, but it did provide a new and predictable policy rule.

However, once the Monetary Policy Committee began targeting headline retail inflation from October 2016, the real interest rate should have taken a back seat. And it did. However, the central bank's rate-setting panel did itself no favours when one of its members justified the committee's first rate cut by reasoning that interest rates the world over had been coming down, and so the MPC was also considering a real rate of interest of 1.25-1.75%.

It doesn't help that certain members of the MPC repeatedly bring up the concept in minutes of the committee's meetings. But even then, it is no surprise to see attempts by the committee to distance itself from the real interest rate guidance proving to be futile.

But on Thursday, when asked what the RBI made of the current level of real interest rate, Governor Shaktikanta Das adopted a slightly different approach than has been the case so far. Instead of just ignoring the question on real interest rates or repeating that the MPC's target was the headline inflation rate--which he did, for full measure--Das refused to tell what level of real interest rate he had in mind.

"As the central bank, I would not like to spell out a real interest rate at this point of time," Das said. "...it is for you to judge, it is for you to take a call how close we are to the real interest rate calculated by you," he further elaborated.

Considering the various ways in which the real interest rate can be calculated--the RBI itself has provided at least a couple of them--and the fact that Consumer Price Index-based inflation is the nominal policy anchor, it makes little sense in providing a real interest rate guidance. And so, Das did not.

RELATED HEADLINES

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* Repo rate cut by 25 bps, stance eased to 'accommodative'

* Cuts India FY20 GDP growth forecast by 20 bps to 7.0%

* Apr-Sep CPI now seen 10 bps higher, Oct-Mar 10 bps lower

* RBI to set up internal panel on liquidity mgmt framework

* RBI to issue revised circular on stressed loans in 3-4 days

* RBI extends relaxed norms on securitisation by NBFCs till Dec 31

* RBI sets up task force to develop secondary corporate loan market

* RBI sets up panel to suggest improvement in home loan securitisation

* RBI moots tighter norms for NBFCs, liquidity cover ratio

POLICY RATES

------------

Repo Rate: 5.75%

Reverse Repo Rate: 5.50%

Cash Reserve Ratio: 4.00%

Bank Rate: 6.00%

Marginal Standing Facility Rate: 6.00%

Statutory Liquidity Ratio: 19.00%

End

Edited by Akshit Harsh

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