Is this is a hawkish, dovish or neutral policy
What we have said is that we have set interest rates at a level that we are comfortable with, given our expectation of how things will evolve. If data come in which move us either towards a significantly higher inflation than what we expect or a significantly lower growth we will take appropriate steps. What I am saying is that, at this point, we feel comfortable given our projections.
What will be the impact of todays actions
I think, in the short run, the cost of funds will come down. But that has been our point that we want to reduce the cost of funds from the level they were raised to give the need for liquidity measures to stabilise the exchange rate. We want to bring it down from that to the higher level that is consistent with current conditions higher than what it was before May 2013, but lower than where it is today. The rate framework is now normalised. It will be fully normalised when we move from MSF being the operational rate to the repo rate. Adding to the term repo facilities will help. But I dont expect the rate to go from MSF to repo, overnight. For that, we will have to wait for market conditions (to stabilise). We will help that along, but at a measured pace.
Do you expect banks to ease rates in response
Its for them to take decisions. I think the banking system is competitive, well see what they do. Cost of funds are higher than what banks would have expected in May 2013. However, the short-term cost of funds is coming down because we have cut MSF rate. That has an effect on the money market rates, on CD rates and it would bring down their cost of funding.
What factors will drive further normalisation of liquidity conditions
Given that the liquidity measures were driven by the exchange factor, it would be a big factor. Once we are confident that the exchange markets are normal, I think at that point, we will feel confident returning to full normalcy.
Are we better prepared to deal with the tapering of quantitative easing
We are better prepared in the sense the RBI and the government have taken some measures to reduce the current account deficit (CAD). Hopefully, we will see full evidence of that when next CAD numbers come out and we will look like less of an outlier in terms of CAD.
I think we definitely are better prepared, but we cant stop doing more because so long as we are running a current account deficit above our comfort level which is 2.5% of GDP we are vulnerable.
Are you concerned about reports of increased gold smuggling
Yes, smuggling is up, probably by an order of magnitude. But the question is, how high was it before It was negligible before and now it is up because of the incentive to smuggle. The big question is, are they catching 1% of the smuggled amount or are they catching 10%. Even if you put the number at a few percent being caught, the overall smuggling is small at present. But that is not to say it cant go up.
Hopefully, if we create some uncertainty about how long these measures will last, it will prevent significant organised smuggling. Also, how is this smuggling going to be financed My sense is one of the bigger sources of finance will be hawala. Which means someone who was planning to send dollars to India in the form of remittances, will now pay those dollar to someone smuggling gold. If that is what is going on, we should see a significant fall in remittances. We dont see that yet.