‘MPC actions will have an impact in bringing down inflation’
Reserve Bank of India (RBI) Governor Shaktikanta Das believes the monetary policy committee’s (MPC) actions will have an impact in bringing down inflation. The MPC, on Wednesday, unanimously voted to up the repo rate by 50 basis points to 4.90 per cent from 4.40 per cent. It also decided unanimously to remain focussed on withdrawal of accommodation (against the earlier ‘to remain accommodative’ stance) to ensure that inflation remains within the target going forward, while supporting growth. “Given the elevated uncertainties of the current period, we have remained dynamic and pragmatic rather than being bound by stereotypes and conventions,” said Das. The RBI top brass, including Deputy Governors (DGs), fielded media queries in a post-policy announcement press meet. Excerpts
Given that your inflation projection is at 6.7 per cent for the full year, will the RBI be aggressive in terms of quantum of rate hikes?
Governor: Our future action will depend on the evolving inflation-growth dynamics. The situation is fast changing, and it will depend on how the situation evolves.
Is there a timeline for launch of Central Bank Digital Currency?
T Rabi Sankar (DG): It will be introduced this year. Various technologies will be used. The only thing I would like to emphasise is that the process of introduction would be gradual, so that there is no disruption in the banking system or the financial system.
Under the MPC framework, if average inflation breaches the upper or lower tolerance band for any three consecutive quarters, it would mean a failure to achieve the inflation target. So, does this mean the RBI will have to be preemptive with liquidity withdrawal and pace of rate hikes?
Governor: You see, in the extremely uncertain conditions that we have and in the context of extremely uncertain outlook, it is not possible to provide forward guidance on what you are mentioning. It will depend on how the situation evolves. With regard to breaching the inflation target framework, we will deal with it as and when the situation arises. The situation is very dynamic. So, I would not like to speculate anything on that. The law is very clear, and we will do accordingly….internally, we examine all possibilities in various directions, under various scenarios.
Why did you not spell out the stance ‘to remain accommodative’?
Governor: No, no, we have. There is a stance. I have said in my statement also…our stance is withdrawal of accommodation.
In your speech you said you are committed to normal monetary conditions in a calibrated manner. Can you elaborate on this?
Governor: If you recall the February 2020 monetary policy framework…it is linked to the overnight rates. The critical factor will be not the quantum of liquidity or any particular level…we have not said that this is the normal rate (meaning the policy rate). All we have said is that when the overnight rates are in alignment with the repo rate. Even currently, the overnight rates are below the current rate, below the repo rate. They’re closer to the Standing Deposit Facility (SDF) rate. So, therefore, a normal condition would primarily mean when the overnight call money market rates, they’re more or less aligned with the policy repo rate.
How does the inflation outlook for the next fiscal year look?
Governor: You see, each action takes its time to play out. Monetary policy actions will take ideally six months or six to eight months to fully play out. And so, therefore, we will watch the evolving situation. And I think the next year’s inflation projection we give it in our monetary policy report. I think, the next report is due in October. So, we will give it at that time
In a tightening cycle, monetary policy is most effective when the liquidity is in deficit mode. Do you foresee a liquidity deficit scenario, going ahead?
Governor: Liquidity again is impacted by so many other factors. The pace of government expenditure, front-loaded capital expenditure, for example, by the government, as it happened last year. If this year also the capital expenditure and other expenditures are front-loaded, it adds to the liquidity. Credit offtake has now improved. The credit offtake increase is by 12 per cent. And if this increase is sustained, then obviously liquidity goes out of the system. So, there are other factors also relating to the forex market, which add or drain out liquidity. So, it’s a constantly evolving situation. All that we are saying is that we will ensure the availability of adequate liquidity. If the liquidity runs into a very heavy deficit, then the repo window is always available that can be used by the system.