Given the volatility, we should underplay the very notion of stance: Abheek Barua, HDFC Bank

RBI is infusing liquidity through open market route (OMO). Cut or change in reserves is not a part of the new dispensation or structure of monetary policy, Abheek Barua, Chief Economist & Executive V-P, HDFC Bank, tells ET Now. The broad message from RBI is they are willing to walk the middle path but within the confines of a market driven apparatus.

Edited excerpts:

Do you agree with Nilesh Shah that retaining calibrated tightening stance gives RBI elbow room to infuse liquidity?

I absolutely agree with Nilesh and I think very quick flip flops in stance can be very confusing for the markets. Given the volatility all around, we should underplay the very notion of stance. The other thing that I want to comment on is that liquidity and liquidity management has in the past been outside the MPCs remit.

In any case, they are infusing liquidity through open market route. Cut or change in reserves is not a part in my understanding of the new dispensation or structure of monetary policy.

People who expected that were also expecting a dramatic change in the very structure in which the RBI currently operates. I am not surprised there. They are infusing liquidity and irrespective of whether or not risk weights have been reduced for some of the vulnerable sectors, while there is a case for enhanced credit flow to sectors like the MSMEs, there is also risk element involved.

The effort should be to figure out how to simultaneously make them credit worthy while giving them more loans through greater regulatory leeway. It is a difficult one and just cutting risk weights might not be the optimal solution taking into account both the risks of default and growth needs on balance.

In the past eight-nine quarters, the average agriculture growth is a little over 4% but there are genuine signs of deep distress in the agriculture sector. Even though the agriculture share in GDP is a little over 15%, the share of the population dependent on agriculture is close to 60%. Would that be a source of immense worry?

Absolutely. We have seen agriculture food price deflation which in a sense suggest that farm incomes, at least for certain categories, are contracting. That certainly is a cause for concern given that both the effective voting population and population in general are dependent on agriculture.

But there is precious little that the RBI can do in that area. I think they have done their bit in highlighting the risks coming from that side and it is not just the risk with the rabi crop but it is a risk that has already panned out in terms of very low prices, moderating wage rates and various other dimensions of the agricultural sector.

The government is trying in many ways to support agriculture. I just hope their efforts pay off soon because there is agrarian distress.

The governor and the deputy governor Viral Acharya spoke categorically about NBFC liquidity at the press conference. What are the signs that you are going to pick up as far as liquidity debate is concerned because that seems to be big bone of contention between Mint Street and North Block right now. Another OMO is lined up in December and was there a terse message for New Delhi to back off on the liquidity demand?

The liquidity shortage is fairly large. It was about Rs 1.1 trillion yesterday but that said, RBI is very clear that it will address the liquidity problem at a systemic level through market instruments rather than a sledgehammer like the CRR. That has been the RBIs stance ever since they adopted this new inflation targeting model. I see no problem with that. There have been incentives coming the way of banks for lending to NBFCs, to the MSME sector in terms of CRR, SLR etc.

The RBIs message is that it will not adopt something which is out of sync with its broad philosophy of using market measures and incentives within the market to push lending to sectors that the government sees as vulnerable. That is a cautious and prudent move given the fact that there are inherent risks in sectors like MSMEs. We have seen a problem with the NBFC sector and these have to be recognised and analysed very carefully before you do something dramatic like lowering their risk weights and so on and pushing large amounts of credit there.

RBI is walking the tight rope between the various pressures that are emerging from different quarters but it is sticking to its philosophy on the way it wants to manage these things. I commend it for it because with the depositor money you need to be cognisant of the risks involved in exposing your book to a particular sector which could lead to large defaults.

Assessing the long-term problems and issues is a way of addressing this on a more comprehensive sustainable basis. The move towards an external benchmark is also welcome in the sense that it will make things more transparent and address some of the concerns that people have raised that MSMEs get short shrift and so on. The broad message is they are willing to walk the middle path but within the confines of a market driven apparatus and incentives within that market driven apparatus.

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