The Reserve Bank of India (RBI) is taking a calibrated approach when it comes to increasing the repo rates to control inflation while striking a balance to enable growth in the economy. Central banks all major economies are raising policy rates in the range of 75-100 basis points (bps) as inflation has become a major pain point across the globe. In that sense, 50 bps rate hike has become the ‘new normal, says RBI Governor Shaktikanta Das in a post-policy press conference. Here are a few excerpts:
Q: The rate hikes have been very sharp and have come in quick succession. Are you not worried that this will kill demand given that they are passed on immediately? Your rate hike comes even after the observation that inflation has peaked and we have seen commodity prices coming off. To what extent is your action linked to the external front?
Shaktikanta Das: Inflation still remains at 7%. Unacceptably high levels. And even according to our projections they remain above 6% for the first three quarters of the current year. The fourth quarter projection we have said 5.8%. So with that kind of a inflation trajectory, obviously monetary policy has to act. With regard to the repo rate actions we have taken, if you see them in comparative perspective, although our decisions have been primarily driven by our domestic factors, if you look all around, other central banks, today, 50 basis points (bps) has become the new normal. Quite a number of central banks are hiking by 75-100 bps. In the RBI, we take a very calibrated and measured view, we factor in impact of rate action on aspect of growth. The aspect of growth and aspect of rate hike on overall consumer demand, urban or rural demand, all that is always factored in and based on that, we have taken a balanced call, based on prevailing growth and inflation dynamics.
Q. With the liquidity situation turning volatile, impact of past hike not fully passed on to deposits so far. How do you see that situation evolving?
Michael Patra: As far as the liquidity situation in concerned, you might have seen there is aggressive deposit mobilisation, staring with the bulk deposits and we expect the deposit mobilisation to catch up very quickly.
Q. For the inflation forecast that you offered today, have the past two rate hikes been factored into that?
Michael Patra: Once a rate action is taken, its a fact. And we use all facts to make our projections. We do not take into account prospective actions. So, in that sense that is the baseline scenario. But the baseline scenario factors includes the fact of us having taken action before.
Q. The domestic credit growth and external demand is also very strong. This is going to have implication on the liquidity in the system. What is going to be the RBI’s response in terms of liquidity crunch with kind of a huge current account deficit as well?
Shaktikanta Das: What is the most likely scenario, of course it is a decision left to the individual banks, but the impact of the rate hikes will be passed on by the banks to the deposit rates. Already the trend has started. Several banks have increased their deposit rates in the recent weeks and that trend will continue. Because, when there is a credit offtake, banks can support that credit offtake if they have deposits. They cannot be relying on central banks money on a perennial basis to support credit offtake. They have to mobilise their own resources and own funds.
With regards to liquidity, we will do two way operations for dealing with liquidity situation that has been prevailing. Last month, there was a sudden squeeze on the liquidity due to very high GST and other tax collections. That was just for 3-4 days, so that is why we conducted the fine tuning operation. We did a repo operation of 3 days maturity. Our effort will be to ensure that there is adequate liquidity. For supporting the credit offtake, the banks will perhaps raise their deposit rates and mobilise more deposits.
Q. How much did the movement in currency weigh on MPC decision to hike rates?
Shaktikanta Das: The monetary policy is a inflation targeting framework while keeping in mind the objective of growth, so it is the inflation-growth dynamics which is the primary factor which determines monetary policy actions. Exchange rate indirectly may come in because rupee depreciation may lead to imported inflation. So its impact on inflation is definitely a factor, but rate per se is not a factor for the MPC to base its decision.
Q. Is the RBI worried that there is a demand-pull factor that is making the inflation persistent? Now that you have said that inflation has peaked at what level will you feel comfortable to pause?
Shaktikanta Das: So far, the current inflation is concerned, I think the demand-pull is not a significant factor. Its primarily because of various supply issues and because of various international developments and because of imported inflation. India did not inject that kind of liquidity and other kind of stimulus support that especially the advanced countries provided to their economies, which has led to demand pressure and naturally has fueled inflation. So far as India is concerned, monetary policy did not fuel inflation, that is the position that comes out of the analysis, as of now. Essentially, inflation is because of supply chain and international factors. It is very very uncertain situation. It is difficult to say at what level will we pause, as the situation is dynamic and extremely uncertain.
Q. Rate hikes are for taming the inflation. Have you estimated any timeline for the inflation to moderate?
Shaktikanta Das: Usually, rate hikes take about 6-8 months to have their full impact. I am saying the full impact. They start having their impact right from the beginning. But to have the full impact its takes about 6-8 months. So therefore the impact of the rate action that we have taken starting in April and then May and June and so on, we will have to wait till October-November to assess their full impact.