MPC, on Thursday, maintained status quo on the key policy rate citing concerns around elevated food inflation, weather-related disruptions and geo-political issues. However, India is emerging as the new growth engine for the world and is standing out for its resilience and stability, according to RBI Governor Shaktikanta Das.

“The financial sector stability is well maintained. Stability is a public good and market participants and financial institutions have an equal share in preserving financial stability. We look forward to their cooperation in this regard,” Das said.

Edited excerpts from the post policy conference which included Deputy Governors Michael D Patra, T Rabi Sankar, M Rajeshwar Rao and Swaminathan J.


How much incremental CRR will need to be maintained?

We have done internal calculations and bank-wise calculations. It will be a little above ₹1 lakh crore. On September 8, we will review this depending on the situation prevailing at that time. We also have to watch the credit off-take from the banking sector. Liquidity decisions are an internal decision of the RBI and a constant process, so we will do an internal review. Liquidity is a very dynamic number and depends on many factors such as growth rate, inflation number. We are nimble in our liquidity actions and monitor this constantly.

Patra: Our assessment is that ICRR will balance out liquidity. Our intention is not to withdraw liquidity but to leave enough there for credit needs of the economy. Our assessment is this should do the job but it’s a dynamic assessment.


Was ICRR the best tool to address a temporary liquidity problem?

There are other methods but at present, in the current situation, according to our assessment, this was the appropriate method. ₹2,000 notes have come back into the banking system. As we go towards the festival season, currency in circulation usually picks up. We have various options, and as and when the situation requires we will deal with it because we also have to ensure there is enough liquidity in the system for banks to continue lending.


The 14-day VRRR remains the main tool but the response has been muted?

The response could have been better to the 14-day VRRR auction, but VRRR being the main operation, these will continue. There is no proposal or thinking to do it daily. We have undertaken fine tuning operations but these are done in exceptional situations and cannot become the rule or a regular feature.


The 4% inflation target is still very far. Does that make you anxious?

Patra: In May, the inflation rate aligned with the target and was comfortable at 4.3 per cent. But then food shocks came which are unpredictable and their period of stay is also unpredictable. We hope that this is a transitory phenomena and they come off when supply improves, which is happening already.


Are you concerned about weak private capex?

At the moment, there is a twin balance sheet advantage. Both bank and corporate balance sheets are strong and deleveraged, so there is space for making investments. Eventually, it depends on individual companies but private investment in some key sectors in happening such as iron and steel, automobile, petroleum, metals, chemicals. Going forward, it should happen in other sectors because the ground conditions are favourable for investment.


What is your assessment of rural demand?

Patra: It has been muted for a long time but we are seeing signs of revival. Tractor and fertilizer sales have improved in June. Retail two-wheeler sales growth has become healthy again and FMCG companies are reporting that rural sales are improving. The progress of kharif sowing has exceeded last year’s level and is still on course to go further, which is a source of income and livelihood for rural economy and that will boost demand.


Have concerns regarding uneven monsoon eased, and is El Nino a bigger concern?

Patra: El Nino is not as dangerous for us but we need to keep our guard on because it can influence withdrawal or extension of monsoon, as we are seeing in recent years where the monsoon stays on for a longer time and effects the Rabi crop, etc. Uneven monsoon is a concern because the rice growing regions of India, particularly East and Northeast, have not received enough rainfall and are still reporting deficiencies in double digit figures but that is correcting. Currently East is getting a lot of rain so we hope that the spatio temporal distribution will even out and we’ll have a normal monsoon.


When will the final ECL norms come in?

Rao: Several inputs have come in for ECL provisions and some are technical issues which need to be examined, so it will take some more time before the measures are rolled out.


Is Russia investing in Indian government securities?

Sankar: It is allowed through the FPI route and special Vostro account route. So actual investments will happen only through these two routes. Here, the rupee balance and buying of securities is basically within the system, so it should not have any significant liquidity impact.


What will be the impact of the amount held in Vostro accounts?

Trade relation with any country is long term so there is no reason to expect that suddenly a country decides to pull out, why should they do that? It’s a continuing trade relation so we don’t see any stress or any concern with regard to the quantum that is held in Vostro accounts from various countries. Also, with $600 billion of FX reserves, we are in a far better place today to deal with any situation if at all it arises, but we don’t see that happening.

Sankar: It may not be accurate to think that the trade surplus is staying in the country because a large part of that is oil, which up to the global cap can be paid through the normal channels. Some of it could remain as rupee balances.