India's Central Bank Chief Says Cash Ban's Effects ‘Transitory’

  • Demonetization didn’t affect flow of credit: RBI’s Patel
  • Defends benefits of having open trade across the world

Urjit Patel

Photographer: Dhiraj Singh/Bloomberg

India’s central bank chief said a phase of rising interest rates is setting in for emerging markets, reinforcing views that monetary policy could be tightened in Asia’s third-largest economy in coming months.

Governor Urjit Patel’s comments follow minutes of policymakers’ April meeting released last week, which were more hawkish than markets expected. Patel, who spoke in New York, said a cash ban imposed in late 2016 probably had no more than a temporary effect, as lending continued to flow.

The “accumulating evidence” points to the effects of so-called demonetization as “transitory,” Patel, who took over from Raghuram Rajan in September, told an audience Monday at Columbia University. “Credit is more important than currency, and credit was not affected at all.”

Authorities have been seeking to rein in liquidity after the government’s November recall of high-denomination currency notes flooded the banking system with cash. The excess funds not only threaten to stoke inflation, but have also constrained the RBI’s ability to intervene at a time when the rupee is rallying.

Households’ inflation expectations “continue to be adaptive and therefore difficult to bring down in a durable manner,” said Patel, who rarely appears in public.

Protectionist Risk

Patel’s comments initially drove the yield on benchmark 10-year sovereign bonds higher on Tuesday. It was down three basis points at 6.92 percent at 11:09 a.m. in Mumbai.

"Policymakers are concerned about inflation and there is a risk that rates could be raised before the year end," said Anjali Verma, economist at PhillipCapital.

In a bid to burnish the Reserve Bank of India’s credentials as an inflation-fighting central bank, Patel has called for “close vigilance” on inflation. Consumer prices rose 3.81 percent in March from a year earlier, having risen 3.65 percent in February. India’s central bank targets keeping inflation around 4 percent in the medium term.

Earlier this month, India unexpectedly raised the reverse repo rate while keeping the benchmark unchanged, effectively tightening policy by making overnight borrowing more expensive, to step up the fight against inflation. 

Speaking about the world economy, Patel said Monday that data points to a broad-based upswing in global growth, though risks remain, such as protectionism and geopolitics.

There is an international push-back against trade talk emanating from the U.S., Patel said, defending the benefits of an open trading system. Companies’ share prices reflect benefits from global supply chains, and “if policies come in the way of that, then the main wealth creators in a country that advocates protectionism” are going to be affected, he said.

— With assistance by Sho Chandra, Kartik Goyal, and Subhadip Sircar

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