The Reserve Bank of India (RBI) will continue to maintain its ‘proactive’ monitoring of the financial sector using “smell tests”. If the regulator “smells any stress building up”, it till treat the same in an appropriate way, governor Shaktikanta Das said at a press conference after the monetary policy committee meeting on Friday. For now, the balance sheet of India’s financial sector continues to be robust, he said.

Other than consumer credit, which are the other segments where any potential stress is building?

Das: As a part of our supervision and very proactive monitoring of financial sector and individual financial institutions, our endeavour is always to remain updated and try to use “smell-test”. Whenever we smell any stress building up at the system or the individual level, we treat it in an appropriate way. At this point of time, balance sheet of Indian financial sector continues to be robust.

Since you said regulator must be mindful of overtightening, will overnight call rate moderate to 6.5%?

DG Michael Patra: In the first few days of December, the call rate has already started gravitating towards the repo rate. On December 4th or 5th, it was at 6.45%. This is coincidental with government spending, as the government balances have been coming down. The previous tightness was also associated with a build up of balances.

Das: We have always tried to take a balanced call. MPC’s primary target is maintaining inflation at 4%, which I have emphasised very clearly. The law also requires that we keep in mind the objective of growth.

Last year in May, we spelt out that we have shifted our focus and prioritised inflation over growth, and the same approach continues. Inflation is our top priority and we still have a distance to reach 4% target. So, the risk of overtightening should be read along with the statement that few months of good data should not push us in a mood of complacency. It would be wrong to assume that there is a change in our approach or any kind of loosening is around the corner, it is not on the table at all.

Transmission of repo rate hikes is not visible in large banks’ savings deposits rate. Is the RBI concerned about this?

Das: Savings account rates have not seen much increase. But, you will appreciate that interest rates are de-regulated and any sort of administered rate for any component of bank deposits would be a very retrograde step. So, we have no such ideas. It is a commercial decision that banks have to take. At times several banks also do increase savings account interest rates depending on their own liquidity assessment or their own balance sheet requirement. This decision is left for the banks to take and so far as the RBI is concerned, the interest rates are de-regulated.

With India’s inclusion in global bond index, will you introduce macro prudential norms if there is heavy investment in benchmark 10-year G-Sec?

Das: We have the capacity to deal with that kind of inflows. If you see our past track record, we managed these flows in both the directions — inflows and outflows. And it will likely be a stable inflow if it materialises from June onwards. We should be able to deal with it.

DG T Rabi Sankar: I think we should cross the bridge when we come to it. Most central banks globally monitor the total holding in any particular security by individual investors. If you look at our history, total amount that is expected to come in due to bond inclusion is between $20 billion and $25 billion. I think back in 2013 we lost close to about $20 billion without having too much of a problem, we managed that. So, concerns that inflows may cause volatility are a bit overblown.

What was the rationale behind bringing in a connected lending framework?

DG M Rajeshwar Rao: Connected lending is essentially lending to persons who are in position to control or influence the decision of a lender. Right now, regulations vary between regulated entities and there are scattered provisions. We are coming out with some draft guidelines to bring in some uniformity.