The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) hiked the repo rate by another 50 basis points (bps) on August 5, to quell inflationary pressures in India’s economy. With this 50-bps change, the repo rate — the rate at which the RBI lends short-term funds to banks — now stands at 5.4 percent. With the latest rate hike, the MPC has hiked the repo rate by a total of 140 bps in the current rate hike cycle, taking the rates to pre-pandemic levels.
The RBI is walking a tightrope on managing the growth-inflation dynamics and draining pandemic-era surplus liquidity from the system. Inflation is the new buzzword across the global financial markets. Central banks across the world are grappling with high price pressures. Retail inflation has stayed above the RBI’s medium-term target of 4 percent for 33 consecutive months and above the 2-6 percent tolerance range for six straight months.
In the Q&A below, RBI Governor Shaktikanta Das talks on a host of issues related to inflation, liquidity management and the MPC’s stance. Edited excerpts:
Rate hikes have been very sharp and coming in quick succession. Are you not worried that this will hurt demand?
Inflation still remains at 7 percent, at unacceptably high levels. Even according to our projections, projections are above 6 percent for the first three quarters of the current year. The fourth quarter projection we have said 5.8 percent. So, with that kind of inflation trajectory, obviously, monetary policy has to act. With regard to the repo rate actions that we have taken, our decisions are primarily driven by domestic factors and domestic situations. But, if you look all around other central banks today, 50 basis points has become the new normal. And a large number of… quite a number of central banks are now hiking by 75 to 100 bps. So, there is a tendency that 75 to 100-bps rate hike will perhaps take over 50 bps. But then, in the RBI, we take a very calibrated and measured view.
We factor in the impact of the rate action on the aspect of growth. The aspect of growth and the aspect of a rate hike on our demand — overall consumer demand, urban or rural demand — is always factored in. And based on that, we have taken a balanced call — based on the prevailing and expected inflation growth dynamics.
Have you estimated any timeline for the effect of rate hikes to moderate inflation?
Usually, rate hikes take about six to eight months to have their full impact. In April, we introduced the SDF at 40 basis points higher than the reverse repo and then the rate hikes of May and June. We will have to wait till October-November to assess their full impact.
Are negative real rates a matter of concern?
Yes, negative real rates are a matter of concern and that is something that obviously engages the attention of the MPC during its discussions and also internally in the RBI.
Will the MPC want to frontload rate hikes and come to positive rates quickly?
That is something that I'm afraid I cannot spell out, because it will depend on the evolving dynamics. And there are two aspects to it. One is our primary target of bringing down inflation closer to the target and factoring in the aspect of growth amid so many international uncertainties and developments. So, the exact approach whether we will frontload or we will space out, is for you to really assess.
As far as the MPC is concerned, we will take measured and calibrated action, depending on the evolving situation. Beyond that, it will not be possible for me to provide an actual, a kind of roadmap that this is how we are going to do. Perhaps you are referring to the kind of dot plot that US adopts. But in the uncertain environment that we are living in today — extreme uncertainty — I think the dot plot itself will have to be revised every fortnight.
Is the RBI worried that an element of the demand-pull factor is making inflation persistent?
Currently, I think the demand-pull is not a significant factor. It is primarily due to various supply chain issues, and various international developments, and because of imported inflation. India did not inject the kind of liquidity and another kind of stimulus support that many other countries, especially advanced countries, provided to their economies, which has resulted in a lot of demand pressure, and naturally, that has fuelled inflation. So far as India is concerned, the monetary policy actions did not fuel inflation. I mean, that is the position that comes out of our analysis today, as of now. So, therefore, it's essentially because of supply chain and international factors that it is happening.
You said that inflation has peaked. At what level will the MPC be comfortable to pause?
It is a very uncertain situation. It is very difficult to say at what level we will pause, because the situation is dynamic. The situation is extremely uncertain.
Is it a fair expectation that the stance will shift from ‘withdrawal of accommodation’ to neutral this year?
It will not be possible to provide a future guidance. Usually, when we are on a rate-cutting cycle, it's easier to provide forward guidance. But since we are on a cycle of rate hikes and given the level of uncertainty, I would not venture to provide future guidance about the rate actions. The future guidance is essentially that we are withdrawing accommodation and we want to control inflation.
Does RBI think they are close to or at neutral rate?
I will not able to sort of reveal that. There are multiple minds and multiple thinking that go on, and they finally converge on my table. From there, after discussion with the senior management, the thinking of RBI emerges.
What was the cause of dissent from external MPC member Jayanth Varma in terms of the stance?
No, the cause of dissent, et cetera, I think you have to wait for the minutes of the individual members. It will not be correct on my part to paraphrase what individual members say in the MPC. Their minutes will come out after two weeks and you will see it.
Did the exchange rate impact the MPC’s decision?
The MPC is an inflation-targeting framework while keeping in mind the objective of growth. Therefore, it is the inflation-growth dynamics that is the primary factor that determines monetary policy actions. Exchange rate, indirectly may come in because it leads to rupee depreciation (which) leads to imported inflation. So, its impact on inflation is definitely a factor, but the rate per se is not a factor for the MPC to really deliberate upon or base its decision on the exchange rate.
What is your assessment on deposit mobilisation of banks?
Most likely, the impact of the rate hike will be passed on by the banks to the deposit rates. Already the trend has started. Several, quite a number of banks have increased their deposit rates in recent weeks. And that trend will continue because when there is credit offtake obviously the banks can sustain and support that credit offtake only if they have higher deposits, they cannot be relying on central bank money on a perennial basis to support credit offtake. They have to mobilise their own resources and own funds. So, that is something which is the most likely scenario.
Will the RBI’s multi-year process to normalise liquidity conditions be completed in this financial year itself, since liquidity is fast getting tight?
The overall liquidity surplus even today is fairly high. If you take into account the money which comes to us at the end of every day under the Special Deposit Facility, the amount of money under 14-day and 28-day Variable Rate Reverse Repo and 28-day VRRR along with the potential government expenditure, the liquidity in the system is upwards of Rs 5 lakh crore, almost going up to Rs 6 lakh crore. Therefore, it will be a multi-year cycle. And also, one important factor is that, some of the TLTROs (Targeted Long-Term Repo Operations), which we announced in the first year for a period of three years, will mature only in 2023. So, therefore, the process will spill over into the next year also.
What is going to be the RBI’s response in terms of liquidity in the backdrop of a strong economic recovery and a huge current account deficit?
With regard to liquidity, we will do two-way operations for dealing with the liquidity situation that is prevailing. Last month, there was a sudden squeeze on liquidity because of very high GST and other tax collections. That was just for about three, four days. So, we conducted that fine-tuning repo operation of three-day maturity. So, our effort will be to ensure that there is adequate liquidity, and the rest for supporting the borrowing, for supporting the credit offtake, I think the banks will raise their own deposit rates and they will make efforts to mobilise more deposits. I would expect the deposit mobilisation process to continue.
What has been the impact of the RBI’s recent measures to increases foreign deposits?
It is too early; we will have to wait and evaluate. It is too early to say what will be the impact because banks have just decided the rates on these deposits.
What is your assessment of the current account deficit?
With regard to CAD, we have analysed various scenarios assuming different levels of crude and commodity prices. And based on that analysis, we…do feel that CAD will remain at sustainable levels.
Any forecast for CAD?
I would not like to mention the number as this is a continuing exercise. If I mention one number, the number may undergo a change depending on the evolving situation. But at this point, based on our forecast, we feel that CAD will be at manageable levels.
Why are guidelines related to digital lending being delayed? There are a lot of complaints related to banking frauds across the country of late?
Most frauds are done by entities that are not regulated by the RBI and come under the purview of law enforcement agencies. We can only govern companies that we give licence to. Guidelines on digital lending is delayed as we want to study it carefully. It will come out very soon.
Is RBI in favour of setting up digital banks?
We are studying the whole digital banking arena not just for cybersecurity and data security, but in terms of its role in the financial services sector. We announced the digital banking unit framework last month. With regard to the digital banks, one of the issues that we are examining is how to make the best use of the possibilities of digital lending. The field is fast evolving. Whatever is necessary for dealing with this, in this entire ecosystem, the RBI will respond to the emerging needs.
What is the RBI aiming to achieve through its measures announced for standalone primary dealers?
It is not really targeted to encourage more inward remittances or anything. It is a facility which we are providing. It will definitely ease payment for many families, especially senior citizens, whose children are abroad and who may be finding it difficult to make online payments. It is just a facility which we have given to improve the ease of making payments, and that's it; nothing more should be seen into it.
We are now confronted with the third black swan event that is happening playing out in Asia. Are we worried about that?You're referring to what is happening in Taiwan probably. I think, it will be extremely premature to call it a black swan event, because we are just about two or three days into it. But as far as India is concerned, our trade with Taiwan is miniscule. It's about 0.7 percent of our total trade. Therefore, the impact on India is expected to be, will be very negligible. The capital flows in terms of FDI (foreign direct investment) are also very low. Therefore, India is not really going to be impacted with regard to what's happening or what is likely to happen in Taiwan.