Reserve Bank of India Governor Sanjay Malhotra and four deputy governors on Wednesday defended the central bank’s policy stance, saying the current rate was appropriate amid evolving growth-inflation dynamics. The RBI reiterated its focus on headline inflation, while saying the liquidity surplus could peak around September before getting absorbed, and monetary policy transmission was largely complete.
Is the RBI comfortable with a negative or very low real rate, or is it focusing more on core inflation?
We are neither dovish nor hawkish. We believe this is the right policy rate given the current growth-inflation dynamics and our outlook. Our framework is clear: the target is headline inflation, not core inflation. We will continue to be guided by headline inflation and endeavour to bring it in line with the target over time.
With liquidity expected to surge after the swap window was opened, do you expect banks to pass on the benefits to customers, especially as they are looking to improve NIMs?
Liquidity will help, but the surplus is likely to be short-lived and may peak around September. It should gradually get absorbed by normal economic requirements, including currency in circulation, higher reserve requirements as deposits grow and maturing forwards. The impact will therefore be marginal rather than substantial. A lot will also depend on the FCNR(B) deposits mobilised, but the excess liquidity should broadly get absorbed over the medium term.
Despite elevated headline inflation, the stance has remained unchanged. What developments would prompt the RBI to reconsider its stance?
It will depend on changes in the growth-inflation dynamics. Price stability remains our primary mandate, and we will remain focused on bringing headline inflation to the 4% target over the medium term. We are looking at the inflation path, its composition and where it ultimately settles. Given the uncertainty, we will take a call, policy by policy, and not give a guidance that we need to change stance, because we are ourselves not sure as to what policy action this will entail.
Do you expect the government measures to be sufficient to protect rural demand from the impact of El Nino, particularly as growth is becoming increasingly dependent on urban consumption?
RBI Governor: The Indian economy, particularly agriculture, has demonstrated considerable resilience. The monsoon is still evolving and El Nino conditions have emerged, but other factors could partly offset their impact. Government measures, improved irrigation and the resilience of allied activities have also helped households adjust and offset some income losses.
RBI DG Poonam Gupta: Agriculture and allied activities complement each other, with allied activities often performing better when agriculture is weak. Irrigation coverage has increased steadily, reducing the impact of rainfall variability. Agricultural credit, farm mechanisation, and the quality and variety of crops and seeds have also improved.
When can we expect the polymer notes to enter circulation?
The polymer notes are aimed at improving durability, particularly for lower denominations with higher velocity, and expanding capacity as currency demand grows. This is currently a pilot, and we will test, and check to see how they perform in the Indian conditions, climate and other infrastructure that we have put in place before deciding on further scale-up. If everything goes as planned, they are expected to enter circulation in the beginning of the next financial year.
The government has amended the Payments Act, and there is talk of an MDR being levied on certain transactions. If a fee is levied on merchants, could it eventually be passed on to consumers?
It is very premature to say anything at this stage. The amendments are still being worked on. Ultimately, the consumer is already bearing the cost in some way or the other. It may not be the same consumer, and it may not be directly visible; the cost could be borne by the broader economy. Someone has to bear the cost. What is important is that we continue to invest in the infrastructure and find the means to do so, whether through MDR or otherwise.
Is there a scope for 7% growth in FY27 considering the data has been better as compared to the forecast?
The 6.7% growth that we have estimated, the outlook that we have given is an estimate. And we have also mentioned that the risks are evenly balanced on both sides. We also gave a fan chart to give the relative probability distribution. So, if you look at the fan chart, there is a possibility that the growth may be 7%.
Is the monetary policy transmission complete?
Monetary policy transmission is about 80 basis points. It has moderated. It was about 90 basis points on the lending side. So, I would say that it is more or less complete.