In the post-policy press conference, RBI Governor Sanjay Malhotra and deputy governors spoke on the impact of the West Asia war and the rationale behind measures taken to arrest the rupee depreciation during the post-policy press conference. Excerpts:
You started providing forecasts for core inflation. What are you trying to indicate here?
For us, the headline is the target and we have to ensure that it remains within the band. That’s the primary goal for us. But at the same time, the various components of inflation and where they are emanating from are also very important. We will continue to look into all components and then take a call on how we need to respond to the various components while keeping in mind that the ultimate target is headline inflation.
Could you shed light on recent RBI measures to stem rupee depreciation? With the scenario now shifted, any plans to ease those limits?
We noticed heightened volatility in the forex markets in the last few weeks of March. We saw that positions were being built up, leading to arbitrage between the non-deliverable forward and the deliverable markets. In normal times, these linkages are important in efficient price discovery—which is why we have focused on expanding, deepening, and enhancing liquidity in these markets.
Excessive building up of positions increases volatility, and perhaps does not help in efficient price discovery. Therefore, such kind of measures are taken and these are reactions to the specific market movements.
These are not signalling any structural change. From the long-term perspective, we stand committed to the development, broadening and internationalisation of the rupee. So obviously, these are not measures which will remain forever.
Would you give the comfort again that rates will remain low?
We are in a neutral state. The possibility of either way cannot be ruled out. So, it is quite possible that these low rates continue for a long time. Structurally, long-term macroeconomic fundamentals remain very strong and continue to drive growth, while price pressures are contained.
What is the crude oil price assumption that RBI has taken to arrive at the inflation projection ? What is your assumption on how long the West Asia crisis to last?
For this year, $85 per barrel and $ 75 for the next year. There is no assumption (on duration of the war).
You have announced about IFR requirement for banks. Could you please elaborate on that?
The bond yields are very high. They can rise or fall, impacting banks’ profitability. Banks have requested us to allow staggering these losses. We had come out with the concept of an investment fluctuation reserve, which to some extent, mitigates. Mark-to-market prices should be factored in because that’s the correct position. If they price it as per the markets, then the very need for this fluctuation reserve goes away.
Are you seeing any kind of signs of stress in the banking system due to supply chain disruption, high energy prices and weak external demand?
So far, we are not seeing any systemic concerns with regard to banks’ profitability. Yes, there will be sectors, which will be hit. We have extended the timeline from March 31 to January 30, and export proceeds repatriation to 450 days until June 30. We will see going forward. But as of now, there is no systemic risk.
Is the transmission of the earlier rate cuts complete into the lending and deposit rates?
Of the 125 bps rate cuts, ~90 bps transmitted to lending rates and over 100 bps to deposits. As I mentioned, the transmission is satisfactory.
Is this growth assumption of 6.9% too optimistic, given that supply chain normalisation takes quite a long time?
We have mentioned that there are more risks to the downside rather than to the upside. If there is prolonged disruption in the supply, which we hope should normalise sooner than later, that can put pressure on the assessment of growth of 6.9%.
Is there a structural issue that the rupee faces, given the persistent FPI outflows?
As I mentioned, macroeconomic fundamentals of the country are very strong. FPI flows are volatile, chasing short-term gains wherever they emerge. They’re not looking at India alone but at multiple jurisdictions. It is just a matter of time before both FPIs and FDIs flow into India’s growth story.
In the past few days, we saw the weighted average call rates going below the SDF. Are we going to see a redeployment of VRRR?
Our attempt is to keep the WACR as near as possible to the policy rate. In times of high uncertainty, we reassure banks that liquidity won’t fall short. That’s why we have allowed it to be in the lower end. It’s still within the LAF. It’s only to give them the comfort and not any signal for a rate reduction.