High volatility in crude oil prices, turbulence in global financial markets, hardening of inflation expectations, and inputs pressures faced by corporations domestically, prompted the Reserve Bank of India to up the repo rate by 25 basis points to 6.50 per cent on Wednesday. It is the second consecutive rate hike by the central bank.

The first hike in the current cycle of rising interest rate trajectory was in June when the repo rate was increased from 6 per cent to 6.25 per cent.

The RBI’s top-brass fielded question from the media after the announcement of the third bi-monthly monetary policy review. Excerpts:

Why is the policy stance still neutral when the repo rate has been hiked twice consecutively?

Urjit Patel, Governor: Well, many of the risks that we have cited, which informed our projections, are on both sides, and that is why we have said that these projections are against the backdrop of balanced risks.

Second, there is a fair bit of uncertainty around the CPI (consumer price index based) prints going forward and, therefore, it was important that we kept our options open depending on the prints coming in over the next few months.

Given the volatility of the prints that seem to be coming most of the time... we emphasised that we would need to monitor the domestic inflation outlook in the coming months very carefully.

For these two reasons the stance is retained at neutral and the risks around the projections are balanced.

What will be the fallout of the geo-political tensions and trade wars on the Indian economy, and how is the RBI planning to tackle that?

Patel: We have already had a few months of turbulence behind us, and it looks like this is likely to continue (for how long I don’t know).

But the trade skirmishes evolved into tariff wars, and now we are possibly at the beginning of currency wars.

Given this, we have to ensure that we run a tight ship on the risks that we control to maximise the chances of ensuring macroeconomic stability and continuing with the growth profile of 7-7.5 per cent, going forward.

We do have things that we have in our favour, which you are aware of.

And if we continue along that path, we can make sure that we don’t add to the global risk profile that would adversely affect us.

We have three banks that are too big to fail. One of them (a private sector bank) is mired in a huge controversy relating to governance and conflict of interest. Regulators such as SEBI and the US SEC are engaging with the bank. Is there any engagement from the RBI also?

NS Vishwanathan, Deputy Governor: I think it is not appropriate for us to discuss any specific bank.

We are alive to what is happening in the banking system, and we are dealing with those situations as they are emerging.

What is the main reason for increasing the policy rate?

Patel: The main reason for increasing the policy rate is to ensure that on a durable basis we come to and maintain the 4 per cent (retail inflation) target.

And we have been away from the 4 per cent number for several months now. So, we took two steps – once in June and once in August – to maximise our chances so that we don’t drift away from 4 per cent and, in fact, move towards 4 per cent on a durable basis.

Related Topics
comment COMMENT NOW