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Informist, Friday, Oct. 18, 2024

 

--Sanjeev Sanyal: RBI managed rupee volatility very well in recent years

--CONTEXT: Comments by PM econ panel member Sanyal in an interview

--Sanjeev Sanyal: India inclusion in global bond indices healthy development

--Sanjeev Sanyal: Fincl system mature to handle volatility from FPI outflows

--Sanjeev Sanyal: Need new CPI basket showing current consumption pattern

--Sanjeev Sanyal: Not worried about external risks to India as buffers strong

--Sanjeev Sanyal: Have fiscal room to counter any growth risks that emerge

 

By Priyasmita Dutta and Sagar Sen

 

NEW DELHI - The Reserve Bank of India has managed the rupee "very well" in recent years, according to Sanjeev Sanyal, member of the Economic Advisory Council to the Prime Minister. Speaking to Informist just days after the Indian currency broke past the 84-per-dollar mark, Sanyal said he is not a believer in these psychological levels.

 

"The question is: is the rupee reasonably stable and is it reflecting evolving conditions outside and what the Reserve Bank's view is as far as adjustments that exchange rate has to make for both internal and external balance? I think their judgement is correct under these circumstances and the rupee has been very well managed in recent years," Sanyal told Informist.

 

The RBI's public stance is that it does not defend any particular level of the rupee's exchange rate and only looks to reduce volatility. However, the central bank's foreign exchange market interventions over the last year or so have reduced volatility to such an extent that banks are not even finding opportunities to trade in the spot market. The rupee crossed 84-per-dollar last week for the first time in two years and remains just above it. Friday, it ended at 84.07 per dollar.

 

"I think this policy has led us to be able to accumulate almost more than $700 billion in reserves, which is a very good buffer to have given all the uncertainties," Sanyal added.

 

The rise in the foreign exchange reserves, which stood at a huge $701.18 billion as on Oct. 4, has come at a time when Indian government bonds have been added to global bond indices, with FTSE Russell saying last week that it would include Indian debt in its indices from September next year. This follows the addition of Indian sovereign bonds to JP Morgan's indices from June this year and to Bloomberg’s from January 2025. According to Sanyal, the bond index inclusion is a "healthy development" as it would help make the rupee a "reserve currency" in the long run.

 

As for the risks from outflows from local debt due to global developments, the former Deutsche Bank global strategist said the Indian financial system is mature enough to deal with such issues, should they happen. "If we want to be a global hard currency...then we have to be comfortable allowing some amount of inflow and outflow to happen more freely," he said.

 

FOOD INFLATION DEBATE

The impact of global developments such as Russia's invasion of Ukraine has also sparked a debate in policy circles on whether the RBI is targeting the right measure of inflation as part of its monetary policy framework. The finance ministry's Economic Survey for 2023-24 (Apr-Mar), published in July, recommended the central bank target inflation excluding food instead of headline inflation as food prices are a supply-side issue and monetary policy can't really control them. The suggestion has been seemingly dismissed even by the RBI, with Governor Shaktikanta Das saying in August that given the high weight of food in the CPI, "food inflation pressures cannot be ignored".

 

According to Sanyal, the solution is to have a new CPI basket which better reflects the current consumption patterns. "I expect that by this time next year we'll probably have a new CPI introduced which will be a much better reflection of our current basket of goods and services because the current CPI is based on a base which is now quite outdated," he said.

 

The statistics ministry is currently working on revising the CPI inflation series using the results of its Household Consumption Expenditure Surveys for 2022-23 (Aug-Jul) and 2023-24. In the current CPI, food has a weight of 45.86%. The 2022-23 consumption survey, details of which were released earlier this year, showed the weight of food items in households' monthly per capita consumption expenditure declined to 46.38% for rural India from 52.90% in 2011-12 and to 39.17% for urban from 42.62%.

 

GROWTH BUFFERS

On the growth front, Sanyal isn’t worried about risks to the economy from abroad given India's "very strong" macroeconomic buffers. While economists have warned of growth momentum slowing down, as suggested by recent high-frequency data, Sanyal said the government has the space to respond to tackle problems that emerge.

 

"For example, the fiscal deficit is running well below what it would be running at this time. So, if necessary, the spending can be ramped up if that is what is needed. There are lots of degrees of freedom," he said.

 

As per latest data, India's fiscal deficit for the first five months of FY25 amounted to just 27.0% of the full-year target, well below 36.0% for Apr-Aug 2023. The Centre is looking to reduce its fiscal deficit to 4.9% of GDP this year from 5.6% in FY24.

 

A key feature of the government's growth-boosting policies has been its flagship production-linked incentive schemes. Launched in 2020 for 14 sectors at an outlay of INR 1.97 trillion over five years, the scheme has been criticised by many even amid demands to widen its scope to new sectors. According to Sanyal, the scheme should not be rushed and be done in a controlled manner.

 

"Let this one round happen, from which we will know a few things. One is we will have a better sense of what works and what doesn't; two, we will know where we should carry this on or has that reached already some critical mass and can be led to run scores. Then we have to take decision whether new ones need to be done," he said, adding that industrial policy must be made carefully "because if you introduce too many distortions into the system, then the overall system will become too complicated".  End

 

Edited by Vandana Hingorani

 

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