The year 2018 saw difference connecting the Reserve Bank of India (RBI) and the management achievement the public domain. The RBI raised the red flag as it feels there is a move to dishearten its power and independence. The government, which has a larger objective, wanted more support from the central bank on several issues ranging from sharing more surpluses, provide credit to MSMEs, liquidity to NBFCs post-IL&FS crisis and relaxing the prompt remedial 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.
Reduction of interest rates
The increase has been a reduction for some time but is still not in a comfortable zone on a continuing basis. The retail inflation was at 2.6 percent in November as against the target of 4 percent. Till July 2018, the CPI was above 4 percent level. The fall below 4 percent on a continued basis makes a case for a reduction the interest rates. The repo rate is currently at 6.50 percent. There have 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 decrease 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.
Few Banks to come out of punctual counteractive action
The government has lately 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 output, lower capital levels and weakening asset quality. The fresh capital infusion will help grow the advances book and also address the asset quality issues. The NPAs are also seemed to be peaking so lower burden of provisioning.
The government is rapid to form a six-member committee under former RBI governor Bimal Jalan to decide the economic capital framework or the sufficient 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 promising markets like India will also face the 'capital outflow' issue as the global unwind of balance sheet gather momentum. The quantitative easing in the past has gasping up the balance sheets of central banks. For example, the size of the US Federal Reserve balance sheet has augmented from less than a trillion dollar to over $4 trillion. The outflow of a dollar has the possible to weaken the rupee against the US dollar.
