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Rajan Hints at Rate Cut, Says India to be “Least Affected” from China Turmoil

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Washington: Reserve Bank of India (RBI) Governor Raghuram Rajan has not ruled out cutting interest rates in India for a fourth time, admitting that the world’s central problem is continued slowing economic growth. “We’ll look at the data as it comes in and take a further view. We have not said we are finished,” he said in an interview with CNBC television in Jackson Hole, Wyoming, where he’s attending an economic symposium. After cutting its repo rate by 75 basis points this year, the RBI kept the rate on hold at its last policy review, saying it wanted to monitor inflation and wait for lenders to further lower their lending rates.

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The RBI, Rajan said, has reached an agreement with the government on a new monetary policy committee that largely meets the goal of transitioning from a system where the governor alone is responsible for decisions in order to insulate it from outside pressure, he said. “The shape of the committee that we’ve agreed to with the government. The government is going to announce this … does do a lot of this,” he said. The agreement on the new rate setting panel was different from a proposal circulated in July that would allow the government to appoint the majority of members. “There’s an agreement with the government, which is not that plan,” Rajan said. He didn’t give more details. The committee would replace the current rate-setting system once the RBI Act of 1934 is amended in parliament. Having a committee would make it easier for individuals to resist pressure and ensure that “monetary policy doesn’t change overnight” if one person drops out, Rajan said. “We also need a transition path from where we are now to that committee,” he said. “It can’t be that overnight the committee takes over and nobody understands what the views of the committee are.”

Rajan said that he sees a “mood of optimism” in India’s economy and that the nation is relatively insulated from a slowdown in China. He called for lawmakers to overcome their differences to implement a goods and services tax, which he said, would be “one of the most important changes in India”. He also said a proposed bankruptcy code would also be “extremely important”. “If we can get a good bankruptcy code, we can start issuing long-term bonds, which is absolutely necessary to finance infrastructure, finance all the big things the government plans,” Rajan said.
He also cautioned the US federal reserve on going ahead with a rate hike, especially at a time when world economic growth is stalling which has led to massive volatility in currency, equity and commodity markets. “My position over time has been don’t do it when the world is in turmoil. “It’s a long anticipated event, it has to happen sometime. everybody knows it has to happen..but pick your time. “Earlier on Friday Federal Reserve Vice Chairman Stanley Fischer that it was too early to tell whether volatility in the market made it more or less compelling to raise rates at the central bank’s mid-September policy meeting.

(IANS)

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Here’s Some Light on Monetary Policy Under Transmission Mechanism

Improving the "transmission mechanism" for capital flow is dependent on a variety of factors but significantly dependent on building investor trust

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Transmission Mechanism
What promotes an efficient Transmission Mechanism of capital is not rocket science but essential. The primary factors are high contract enforcement, low bureaucracy and efficient courts of law. Pixabay

BY TAPONEEL MUKHERJEE

The Reserve Bank of India decided to hold repo rates unchanged in its meeting on December 5, 2019. In this context, apart from the outlook on inflation, the crucial area of focus should be the “transmission mechanism” of the rate cuts already delivered in 2019. In common parlance, “transmission mechanism” can be interpreted as the chain effect of rate cuts being passed on to the inter-related and inter-linked sectors in the overall ecosystem, to both lower the cost of credit and increase the availability of credit. Primarily, raise the money supply. The concept of an effective “transmission mechanism” is vital for India, both within the context of monetary policy and in the broader contexts of investments, capital flow and effective policymaking. The transmission of monetary policy, capital flows and

information must be all improved.

Within the context of monetary policy, the transmission mechanism is vital to ensure that the cost of credit is being lowered even as more substantial quantities of credit become available. It is a no brainer, that as resources for purveying credit rises with the banks so does the availability of credit for consumers. From the perspective of resolving some of the impediments that the economy is currently facing, it is critical that the low rates are passed on through a lower cost of credit and more credit availability and that the cost of credit itself is lowered across the term structure of interest rates.

An increase in short-term liquidity at the short end of the interest rate curve will eventually translate into lower longer-term yields for all. While short-dated credit availability is of prime importance, a sustainable drop in credit costs in longer tenures will significantly help in providing impetus to the investment cycle. Basically, as the cost of credit drops for longer borrowing periods, potential investment projects become increasingly attractive, given that the cost of financing the projects declines relative to the potential investment return. This increasing attractiveness of projects relative to the cost of capital will be a prime mover in getting the private investment cycle to get going in full flow.

Transmission Mechanism
The Reserve Bank of India decided to hold repo rates unchanged in its meeting on December 5, 2019. In this context, apart from the outlook on inflation, the crucial area of focus should be the “Transmission Mechanism” of the rate cuts already delivered in 2019. Wikimedia Commons

As mentioned above, the “transmission mechanism” must not be limited to just monetary policy but must focus on the concept of capital flows.

Given the constant talk about how crucial private capital is to finance Indian infrastructure and the need global capital has for returns in a low-yield world, the essential point is that the “transmission mechanism” that allows global capital to flow truly and easily needs to be continuously improved.

Improving the “transmission mechanism” for capital flow is dependent on a variety of factors but significantly dependent on building investor trust through efficient capital flow templates. Mainly, expedited and precise project execution will be vital for India to create an effective transmission mechanism to generate significant capital flow.

In this regard, it is important to note that the efficient capital flow framework is as vital for international capital as it is for domestic capital. In fact, without domestic capital from both households and the private sector finding its way to finance the future businesses and infrastructure, international capital will be harder to come by. Effective transmission mechanisms are required for creating capital flow that can genuinely bridge the investment gap in India.

The answer to what promotes an efficient transmission mechanism of capital is not rocket science but essential. The primary factors are high contract enforcement, low bureaucracy and efficient courts of law. While the importance of these factors is well known, the governments both at the centre and the states must work together to deliver on the efficient transmission mechanisms required for efficient capital flow.

Transmission Mechanism
Within the context of monetary policy, the Transmission Mechanism is vital to ensure that the cost of credit is being lowered even as more substantial quantities of credit become available. Pixabay

Beyond the financial implications and factors around transmission, effective transmission of both monetary policy and capital hinges upon trust that contracts will be honoured as per the law and speedy resolution of issues around contract enforcement will be provided for. For India to push ahead towards generating capital for both an investment and consumption upswing in the economy, and for continuously improving “transmission mechanisms” in the economy, a focus on the right policy in respect of “transmission mechanisms” is the need of the hour.

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Additionally, ensuring that the policies that are implemented can create positive ripple effects in the economy is of equal importance. Transmitting the policy changes as far as possible within the value chain will be the real game-changer.

(The views expressed in this article are personal and that of the author. The author heads Development Tracks, an infrastructure advisory firm) (IANS)