Can RBI Governor risk undoing what he has achieved?

Many in the market may be hoping that Shaktikanta Das simply repeats his October monetary policy statement when he goes on air Friday morning.

Das is prone to making long speeches. The market, which can’t spot too many faces to trust, looks up to him. On Friday (December 4), traders and analysts — people who can be amusingly finicky — will weigh every line he says and compare the Guv’s choice of words with that in the previous address. If he comes across as even a tad hawkish, bond prices would slip and bond yields — a proxy for interest rates — would inch up instantaneously.

For Das, that would be bad news. The tide of liquidity he has released and which is now sloshing around the money market would make most central bankers uncomfortable in normal times. They would typically argue that with money supply growing at a pace that far outstrips real growth, it’s a matter of time the surplus liquidity would stoke inflation and create asset bubbles that can’t be tamed in a non-disruptive manner.

But Das and his men know that this easy money has helped to push down mortgage rates and lower cost of funds for corporates. Also, as banker to the government, he has to keep the market convenient for the central and state governments which have quite a bit of borrowings left. And, despite the GDP shrinking at a slower pace, Mint Street (like the Main Street) can sense that it’s too early to celebrate.

Can Das really afford to do — or, even say — that could suddenly reverse the bond yields that have softened? He could run the risk of undoing what he has done. But RBI, like any central bank, is probably trying to grasp how and when the negative consequences of a sea of liquidity may unfold. It’s a point that more than one member of the monetary policy committee (MPC) would remind Das.

The MPC members vote whether or not to change the benchmark interest rate and the stance on liquidity. Any step on liquidity or guidance is the domain of Das. That’s where the wording of Friday’s policy assumes significance. Even if the monetary policy committee (MPC) retains the ‘accommodative’ stance on liquidity — that is promising enough money in the market — what can the governor say, without hardening interest rates, that will signal that RBI is also conscious of the risks of surplus liquidity? Even if Das mentions it, will RBI announce measures — like a long-term reverse repo window for banks to park extra money with the central bank or a calendar on open market operations — to drain the surplus liquidity? Perhaps, not just yet.

However, even as bond traders enter the policy with a fair degree of complacency that Das ‘will not do anything immediately’, there is a lurking fear that RBI may drop a hint on its concerns about overflowing liquidity. There’s another worry: some call it the ‘Michael mania’, coined after RBI deputy governor Michael Patra — the tall, articulate RBI old-timer — whose hawkish statements, appearing in the MPC minutes (which are released a fortnight after the policy address) have in the past reversed bond yields and taken dealers by surprise. The market had then felt that the words of an insider, though very different from that of his boss, were a kind of signal from RBI. Patra has been quiet since August when market sharply reacted to his statements. Now, will the new inflation numbers tempt him to talk again? Banks and bond houses are also guessing if there’s another Patra in the new MPC who may toss another googly — a little anxiety that rising inflation may embolden the hawks in the committee.

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