‘We expect inflation to come close to the target over a two-year cycle’

The Reserve Bank of India raised the repo rate by 50 bps on Friday while maintaining its stance as ‘withdrawal of accomodation’ in the face of elevated inflationary pressures. The central bank also cut its growth forecast for FY23 to 7 per cent from the earlier 7.2 per cent, citing heightened global uncertainties and aggressive rate tightening by advanced economies. Even as it battles fire on all fronts, the RBI seems to be optimistic and confident of India’s growth. RBI Governor Shaktikanta Das and other officials spoke to the media at a post-monetary policy press conference. Excerpts.

Will the RBI continue to frontload rate hikes because the stance has remained the same?

Frontloading has been mentioned by individual members of MPC in their respective minutes. In the MPC resolution over the last 3-4 meetings and today, we have not used the word ‘frontloading’ in the resolution of my statement. All we have said is that it is calibrated to the evolving and anticipated situation.

Has the ‘third shock’ of turmoil in advanced economies led to the RBI recalibrating the quantum of required rate hikes?

The third major shock has indeed been a shock. It has further accentuated the overall uncertainty in global financial markets and created excessive volatility. When currency depreciates, the whole scenario of imported inflation plays out. Guidance by US Fed also talks of pretty big future rate hikes. The overall stress on the global financial system has become much more in the aftermath of the monetary policy tightening and communication by advanced countries’ central banks, and we have to deal with the spill overs.

You revised the growth forecasts for FY23. Are you concerned about growth at this point?

DG Patra: The adjustment in projections take into account Q1 FY23 data by NSO, which was below our forecast. Otherwise, there is actually a pick-up in momentum in the rest of the year. We remain focussed on price stability, but we have a dual mandate. So, we do take into account our concerns about growth.

Will the RBI stance change if the liquidity goes to deficit and real rate becomes positive?

The situation is still playing out. Overall monetary conditions, taking into account liquidity, repo rate and current and future inflation, are still accommodative. We expect inflation to come close to the target over a two-year cycle, but there are so many uncertainties.

Can you give a little more assurance on the current liquidity situation?

Liquidity is not tight, the net LAF continues to be in surplus for more than 2 years, except for maybe 2-3 days. Second, many banks are holding excess SLR and CRR, and some have started dipping into them to support and sustain their lending operations. Then there has been temporary movement of system liquidity into a different basket because of high GST and direct tax collections. In H2 FY23 government expenditure is also always very high. If you take everything into account, system liquidity is in the order of about ₹5-lakh crore. There should not be any concern about liquidity suddenly being tight

How much room does the RBI have to further intervene in the FX market, given that more devaluation in the currency is expected?

In almost all parameters, India’s vulnerabilities are far less than other emerging market economies. In Q1 FY23, on a BoP basis, there has been an accretion of $4.6 billion. Taking into account the current level of reserves and the various vulnerabilities vis-a-vis the external sector, we are comfortably placed and our buffers are quite strong.

Is the RBI comfortable with the rupee at 82 per dollar levels?

It all depends on the macro-economic fundamentals and overall global situation, which is constantly changing. We don’t target a specific rate, and I’m not just saying that as a part of the conventional lexicon of the RBI, we mean it.

Is 5 months’ trade data enough to assess the CAD for FY23?

DG Patra: We are watching the trade deficit, but there are other moving parts in BoP. Oil prices have eased, so oil import bill will be lower. Windfall taxes have been slashed so petroleum exports have grown 23 per cent in August. Services exports are doing really well. We expect CAD may widen modestly in H1 FY23, but narrow in H2 FY23, so overall we expect it to be under 3 per cent.

Published on September 30, 2022

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