Our position is withdrawal of hosting, says Das

Reserve Bank of India (RBI) Governor Shaktikanta Das believes that the actions of the Monetary Policy Committee (MPC) will have an impact on reducing inflation. The MPC on Wednesday voted unanimously to raise the repo rate by 50 basis points to 4.90% from 4.40%. He also unanimously decided to continue to focus on withdrawing accommodation (as opposed to the earlier stance of “remaining accommodative”) to ensure inflation remains on target going forward, while supporting growth. “Given the high uncertainties of the current period, we have remained dynamic and pragmatic rather than being bound by stereotypes and conventions,” Das said. Senior RBI brass including Deputy Governors (DGs) answered questions from the media during a press conference following the announcement of the policy. Extracts

Given that your inflation projection is 6.7% for the full year, will the RBI be aggressive in terms of the quantum of rate hikes?

Governor: Our future action will depend on the evolution of the inflation-growth dynamic. The situation is changing rapidly and it will depend on how the situation develops.

Is there a timeline for the launch of central bank digital currency?

T Rabi Sankar (GM): It will be presented this year. Different technologies will be used. The only thing I would like to point out is that the introduction process would be gradual, so that there is no disruption in the banking system or the financial system.

Under the MPC, if average inflation exceeds the upper or lower tolerance band for three consecutive quarters, it would signify a failure to meet the inflation target. So does that mean the RBI will have to be preemptive with the withdrawal of liquidity and the pace of rate hikes?

Governor: You see, in the extremely uncertain conditions that we have and in the context of an extremely uncertain outlook, it is not possible to provide forward-looking guidance on what you mention. It will depend on how the situation develops. As for breaching the inflation target framework, we will address this as the situation arises. The situation is very dynamic. So I wouldn’t want to speculate on that. The law is very clear, and we will do accordingly…internally, we are looking at all the possibilities in different directions, under different scenarios.

Why didn’t you specify the position “to remain accommodating”?

Governor: No, no, we have. There is a position. I also said in my statement…our position is to withdraw hosting.

In your speech, you said that you undertake to respect normal monetary conditions in a calibrated way. Can you elaborate on this subject?

Governor: If you remember the monetary policy framework from February 2020… it is tied to overnight rates. The critical factor will not be the quantum of liquidity or a particular level…we did not say it was the normal rate (ie the key rate). All we said is that when the overnight rates are aligned with the repo rate. Even now, overnight rates are lower than the current rate, lower than the repo rate. They are closer to the Permanent Deposit Facility (SDF) rate. So, therefore, a normal condition would mainly mean that when the overnight money market rates are more or less in line with the policy repo rate.

What does the outlook for inflation look like for the next fiscal year?

Governor: You see, every action takes its time to unfold. Monetary policy actions will ideally take six months or six to eight months to fully materialize. And so, therefore, we will be monitoring the development of the situation. And I think the inflation projection for next year, we give it in our monetary policy report. I think the next report is due in October. So we’ll give it then

In a tightening cycle, monetary policy is more effective when liquidity is in deficit mode. Do you foresee a cash shortfall scenario in the future?

Governor: Liquidity is again affected by many other factors. The pace of public spending, anticipated investment spending, for example, by the government, as happened last year. If this year also capital expenditure and other expenditure are concentrated at the beginning of the period, this adds to the liquidity. The credit drawdown has now improved. The increase in the credit drawdown is 12 percent. And if this increase continues, it is obvious that liquidity is leaving the system. So there are other factors also related to the foreign exchange market, which add or drain liquidity. So it’s a constantly evolving situation. All we are saying is that we will ensure that adequate liquidity is available. If liquidity runs into a very large deficit, the repo window is still available and can be used by the system.

Published on

June 08, 2022

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