After announcing a pause in interest rates, RBI Governor Shaktikanta Das said future action will depend on the evolving situation. Although headline inflation has eased, there is no room for complacency. He said the MPC remains resolutely focussed on a 4 per cent inflation target in the interest of sustainable growth. He and senior officials of the central bank responded to questions from the media. Excerpts:


There is greater willingness for VRRRs against VRRs. Is the RBI more comfortable with a higher call rate?

Our target of monetary policy, 6.5 percent, is the policy repo rate and typically our expectation is that, and what we would like to see is that the overnight call rates are also aligned to 6.5 per cent. Beyond that, it is a function of day-to-day or week-to-week fluctuation in the overall liquidity situation, so we expect and we would like the overnight call rates to be aligned with 6.5 per cent policy rate. Whether there is a preference for VRR or VRRR that depends on the prevailing situation in the market, and we will remain very nimble and flexible and act swiftly as we have done over the last four days. We will do two-sided operations according to the requirement. There is still some amount of liquidity sitting there, and when we say banks are cautious, let us remember that through the VRRR auctions till yesterday, about 1.50 lakh crore have been mopped up through VRRR operations.


Why are banks cautious because participation in VRRRs has been low? And how do falling rates augur for rate transmission?

Michael Patra: The reason for caution among banks is that there is an imminent Advanced Tax outflow, which is always sizeable that will happen in the next week, so they are holding back money for that purpose, but as you saw we were persevering in our efforts; the fact that we repeated our auctions indicated our purpose, which is what we wanted to convey. It was important, therefore, to withdraw that excess liquidity so that the deposit rate and lending rate that were suffering become aligned with the interest rate cycle.

Shaktikanta Das: It is necessary that any segment of the market does not prematurely assume certain things and then start cutting rates on both, whether in the asset side or deposit side, whether it is interest rates or in the deposit side; it’s a commercial decision. I mean you as you know both deposit rates as well as interest rates for loans are all deregulated. Banks are free to do it, but if they are doing it on the assumption of a certain action that is likely to be taken by RBI, I think that would be or that would be wrong. Our liquidity action also should be seen in the context that our monetary policy stance, and our policy rate is well aligned with the interest rates ,which are prevailing in the market, including banks.


When will the ECL norms be rolled out, and have banks expressed concerns over the deadline?

Das: If look at our track record, we give time for compliance. We will give them sufficient time for implementation of ECL norms. Whenever we issue new norms, we give time. There’s no need to create any panic or anything the comments have been received as the Deputy Governor has pointed out, they are under examination and will issue the circular, but we are mindful of the fact that the banks will need some time to implement it. We have assessed the additional capital requirements and it’s quite manageable as per our assessment.


What will be impact of MSP hike on inflation, and has it been factored in the revised projection?

Michael Patra: We got the MSP data yesterday and we find that the average increase across all crops is about 7.5-8 per cent, so over and above our projections this will impact to the extent of 10-12 bps.


Is there a level of real rate that will make it restrictive for the economy to keep growing? And is the RBI comfortable with a rising interest rate differential with the Fed?

Das: Our monetary policy actions are determined primarily by domestic conditions. We do not look at the action of other central banks to determine our actions, but yes we do watch other what other central banks are doing, because that will have an impact on the global financial situation, currency markets and other aspects.

Achala Jethmalani, Economist, RBL Bank
Achala Jethmalani, Economist, RBL Bank  Achala Jethmalani, Economist, RBL Bank  
Rajani Sinha, Chief Economist, CareEdge
Rajani Sinha, Chief Economist, CareEdge  Rajani Sinha, Chief Economist, CareEdge  
Mitul Shah, Head of Research, Reliance Securities
Mitul Shah, Head of Research, Reliance Securities  Mitul Shah, Head of Research, Reliance Securities