The year 2018 saw differences between the Reserve Bank of India (RBI) and the government reaching the public domain. The RBI raised the red flag as it felt there is a move to undermine its authority and independence. The government, which has a larger objective, wanted more support from the central bank on several issues ranging from sharing more surpluses, providing credit to MSMEs, liquidity to NBFCs post IL&FS crisis and relaxing the prompt corrective action (PCA) framework for allowing some of the banks to lend. The growing differences eventually led to the exit of governor Urjit Patel. The RBI under the new governor Shaktikanta Das has quite a lot on its plate in 2019. What to expect from RBI in 2019:
Easing of interest rates
The inflation has been easing for sometime but is still not in a comfortable zone on a sustained basis. The retail inflation was at 2.6 per cent in November as against the target of 4 per cent. Till July 2018, the CPI was above 4 per cent level. The fall below 4 per cent on a sustained basis makes a case for easing the interest rates. The repo rate is currently at 6.50 per cent. There has been two hikes in the recent past because of hardening of inflation. There is a likelihood of RBI changing its stance from 'calibrated tightening' to 'neutral'. There may be a 25 basis points reduction in repo rate in April policy. The way oil is falling, there can be a repo rate reduction much earlier. But more than the governor, the six member monetary policy committee (MPC) will take the call.
The government has recently committed more capital for the public sector banks. This has brightened the prospect of 11 banks that are under the RBI's watch because of falling profitability, lower capital levels and deteriorating asset quality. The fresh capital infusion will help grow the advances book and also address the asset quality issues. The NPAs are also seem to be peaking so lower burden of provisioning.
Transfer of surplus capital
The government is quick to form a six-member committee under former RBI governor Bimal Jalan to decide the economic capital framework or the adequate level of reserves. There is a lone RBI member (deputy governor) in a six-member committee. There is a strong possibility of the committee fixing a level of capital, which will release more surpluses to the government.
The emerging markets like India will also face the 'capital outflow' issue as the global unwinding of balance sheet gather momentum. The quantitative easing in the past has puffed up the balance sheets of central banks. For example, the size of the US Federal Reserve balance sheet has increased from less than a trillion dollar to over $4 trillion. The outflow of dollar has the potential to weaken the rupee against the US dollar.