The Reserve Bank of India’s (RBI’s) monetary policy will continue to remain watchful and nimble, based on incoming data and evolving situation, governor Shaktikanta Das said in a press conference after the monetary policy meeting. The world is in the eye of a financial crisis, but the Indian economy remains resilient and the rupee has seen orderly depreciation. The focus of the central bank is on prudent intervention in the forex market and reserves, he said. Here are a few excerpts from the conference:
Q. What stands out is movement of currency. It looks like the US Federal Reserve is going to keep on increasing rates and there is going to be spillover in the currency market. What is going to be your approach when there is going to be increased volatility in the days ahead, and will MPC (Monetary Policy Committee) decisions be guided only by the domestic inflation factors?
A. The MPC decisions, as you have pointed out, continue to be guided, and will be guided by domestic factors. There are two components in the monetary policy framework; one is the inflation, the second one is that we are required to keep the requirements of growth in mind. Other than that, currency market fluctuations are not a factor which is for consideration of the MPC. For dealing with those situations, the RBI has other instruments that will be deployed as per requirement. So, just to confirm, currency movements are not the guiding factors for our monetary policy decisions, which are based on the domestic inflation-growth dynamics.
Q. The rupee has behaved in an orderly fashion and the RBI’s stated policy is to intervene only to smoothen the volatility in the market. What is the volatility? How do you define that volatility?
A. Volatility would mean a sudden decline or a certain appreciation. Now, what that sudden is, it’s not possible to quantify. It is based on our assessment; you have to see all around at what is happening the world over. What is happening to the other currencies, also, you have to keep in mind; you have to keep in mind whether the exchange rates are going out of sync with our macroeconomic fundamentals. So, there are various considerations which go into our decision. But this is monitored continuously, almost every day on an ongoing basis, and based on that, decisions are taken.
Q. Does the RBI’s stand on front-loading rate action remain the same as its stance continues to remain ‘withdrawal of accommodation’?
A. Front-loading, if you see, to the best of my recollection, is not there in the MPC resolution, or in my statement. Front-loading has been mentioned by the individual members of the MPC in their respective minutes. In the MPC resolution, or the last three-four meetings and today, we have not used the word front-loading. That is the perception of each member. All that we have said in the MPC resolution and in my statement is that it is calibrated to the evolving and anticipated situation.
Q. Has the third major shock, which is the tightening of monetary policy by advanced economies, altered the RBI’s thinking?
A The third major shock has indeed been a shock. It has further accentuated the overall situation in the global financial markets. It has had its impact on creating excessive volatility in currency markets in particular. When currency depreciations take place all over the world, they happen all over the world. Let me talk about the Indian situation. Naturally there will be whole scenario of imported inflation that plays out, and that is built into our inflation projections. The third shock, as we see, has added to the already heightened uncertainty that was prevailing, and the forward guidance given by the US Fed in particular also talks of future rate hikes, which are substantial. So, the overall stress on the global financial system has become much more in the aftermath of the monetary policy tightening, and communication by the advanced countries’ central banks. Nobody is blaming anyone. They have their domestic necessities and requirements for which they are taking steps, but we have to deal with the spillovers.
Q. Can you give more assurance on liquidity?
A. The liquidity is not tight. The net LAF continues to be in surplus for more than two years, except I think maybe for two-three days, because of the SLF for the primary dealers; if you take that into account then it became deficit. But liquidity has remained positive throughout the last two-and-a-half years or so. Secondly, many of the banks are holding excess SLR and CRR, and some of them have also started dipping it because they need the cash to support and sustain their lending operations. And then there is this temporary movement of liquidity from the system as it has gone into a different basket because of high GST and direct tax collections. The second half expenditures of the government are always very high. So if you take everything into account, the system liquidity is in the order of about `5 trillion. So, I think there is no worry about should there not be any concern about liquidity being suddenly tight.
Q: The RBI has been very effective in transmitting interest rates on the lending side because of the repo rate-linked loans, but on the deposit side rates are very slow to move. Do you think it’s desirable to have similar linkage on the deposit side as well?
A. Our external benchmark is linked to the lending rates. There is still surplus liquidity in the system, but all of you are talking about liquidity tightness. Credit is picking up, so obviously the banks need more resources, for which they have to necessarily raise their deposit rates. The repo rates have been increased by 190 basis points after we started this cycle of raising interest rates. So, with I think all these factors taken together, the banks will increase deposit rates going forward. Our expectation is that going forward, you will see more traction with regard to the adjustment of deposit rates.