Under new Governor Urjit Patel, RBI is expected to institutionalise policy changes initiated to curb inflation and clean up the balance sheets of banks, Fitch said on September 2.
Low inflation will positively impact India’s credit rating by improving investment climate, the global agency said. It added however that the inflation target range under the monetary policy framework agreement is “broad”, in the sense that 2 per cent seems quite low and 6 per cent quite high for an emerging economy like India.
“But it seems to make sense to have a rather broad range around the 4 per cent mid-point, as food and oil price movements can have a large impact on headline inflation,” Fitch Director, Asia-Pacific Sovereigns Group, Thomas Rookmaaker said in a statement.
Structurally low inflation would, Rookmaaker said, “positively impact the sovereign rating profile as it would improve the investment climate and, hence, contribute to sustainable growth”.
On new Governor taking charge of RBI, it said Fitch would look at actual policies rather than personalities to decide on rating action. Patel is set to take over as RBI Governor next week from Raghuram Rajan who demits office on September 4.
“The fact that Patel has served as deputy governor in the past three years, suggests continuation of the current policy direction in the years ahead. Patel seems well-positioned to further institutionalise these policy changes in the period ahead,” Rookmaaker said.
On differing views between RBI and the government on monetary policy, he said differences of opinion between governments and central banks on what needs to be done are “rather common”.
“But the question is to what extent the central bank is actually pressured to follow the government’s line. The inflation targeting framework now in place, should reduce the impact of such pressures…,” he said.
It will be interesting to see how this will play out in the Monetary Policy Committee, in which members appointed by both the government and RBI will have a vote on monetary policy, he said. The MPC will have three members, including Governor, from RBI and three government nominees.
Rookmaaker added that Patel was part of the team at RBI that set in motion significant policy changes to deal with both high inflation and weak bank balance sheets, including through the set-up of new policy frameworks.
“But it is too early to tell if inflation will in practice be skewed to one side of the range,” he added.
Fitch Ratings had in December 2015 affirmed India’s ‘BBB-‘ rating with a stable outlook. BBB- is lowest investment grade and just a notch above junk grade.
