India has far more degrees of freedom than Federal Reserve: V Anantha Nageswaran on RBI policy

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V Anantha Nageswaran, EAC-PM Member, in an interview with ET Now tells that RBI’s policy, unlike in other countries is not active suppression on the real rate and the central bank has taken into consideration only priority points for economic growth. Edited excerpts:

Mythili Bhusnurmath: There is a most significant part of the governor statement that subtle shift in the forward guidance and the deceleration of definite number for the kind of support that the RBI is going to give the secondary market for G-Sec.

V Anantha Nageswaran: Yes, I think that is good. They are very clear that the focus is on the term premium although, it was not mentioned in those terms and he correctly mentioned that since this is an important interest rate for many other interest rates. I think it signals that the central bank is determined and the market participants are being given a very unambiguous message that the central bank is not going to led, especially, since the government’s actual fiscal numbers are turning out better than the conservative assumptions which they put out earlier which is what I expected and therefore they do not want the cost of capital for the government’s borrowing to derail the cost of borrowing in other segments. To that extent, I think RBI’s decisiveness and the clarity of the signal both are highly welcome.

Mythili Bhusnurmath: Has the Reserve Bank somewhere lost sight of the fact that savers also are important and if you continue to pay negative real rate of interest to the savers, we have already seen household savings come down. Is the excessive focus on borrowers at the cost of savers a wise thing over the medium to long term?

V Anantha Nageswaran: That is a valid point you are raising but policymakers face tradeoffs which outsiders commenting on them do not. Therefore, they have to take into consideration the fact that at this point in time, this is their priority and hopefully at some point if they can succeed in bringing down the rate of inflation which is what they are focussed on, then along with the recovery in the economy which it becomes sustainable that the real rate of interest will naturally go up and if it is happening and commensurate with the risks facing the real economy, then they would be comfortable with that. I do not think the RBI’s policy unlike in other countries is active suppression on the real rate. It is a tradeoff that they are facing, therefore at this point in time I would be reluctant to be harsh on them.

Mythili Bhusnurmath: The interest rates in the government G-sec market which does form the basis for all other interest rates is determined by fundamentals, is there some disconnect between this statement and the RBI’s complete rejection of bids at auctions. Does it in some ways seem that it is not really driven by fundamentals? What the Reserve Bank would like those fundamentals to be?

V Anantha Nageswaran: I would like the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England to answer questions regarding economic fundamentals and monetary policy before I venture to criticise the Reserve Bank of India.

Mythili Bhusnurmath: The Federal Reserve just has to print those colourful pieces of paper and everyone all over the world wants those papers whereas we are takers of the Federal Reserve’s policy, we cannot dictate the terms for the global markets?

V Anantha Nageswaran: I think I disagree with you. I disagree with the premise completely.

Mythili Bhusnurmath: You think we have as many degrees of freedom as the Federal Reserve?

V Anantha Nageswaran: I think right now they are locked in certain policies over which they have no control, they have been dragged into fiscal dominance and given that they cannot afford to raise interest rates at all without jeopardising the economy. The last time they had to do in 2019 they had to do a 180 degree U-turn immediately after reaching 2.5%. I would submit that I think India has far more degrees of freedom than the Federal Reserve has.

Mythili Bhusnurmath: The inflation projections of the Reserve Bank of India, are they realistic, they are marginally up compared to what the projections that they had made in the month of February but given that we are seeing commodity prices rise all over the world, are these inflation projections a little conservative?

V Anantha Nageswaran: The answer depends on whether these commodity price spikes would turn out be sustainable and also have a permanent impact on the underlying inflation rates in the developed world and there I think the evidence is still mixed. The central banks in those countries themselves do not believe that the inflation acceleration if any, would be anything more than transient, in that sense India’s own inflation rates would very much be a function of its own monsoon and food prices etc.

Oil prices yes, there is some preference by the producers to look at a price of close to Rs 80 but they have also announced increase in production so a lot depends on whether the developed countries’ growth spur turns out to be just a base effect induced acceleration and then it peters out. It will also depend on how their financial markets themselves behave. If they have a correction which is a significant one, then I think animal spirits will go down, so the risk as he put it– is quite balanced rather than one sided.

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