Monetary policy: Negative interest rates are a matter of concern, says RBI

'The monetary policy is an inflation targeting framework while keeping in mind the objective of growth', said Das

After the MPC’s decision to hike repo rate by 50 basis point (bps) to 5.4 per cent, Governor Shaktikanta Das, Deputy Governors Michael Patra, MK Jain, T Rabi Sankar, and M Rajeshwar Rao spoke to the media. Edited excerpts:

The rate hikes have been sharp and in quick succession. Are you not worried that this will kill demand?

Das: Inflation still remains at 7 per cent, which is unacceptably high. According to our projections, they will remain above 6 per cent for the first three quarters of this year. The fourth quarter projection is 5.8. With this kind of an inflation trajectory, obviously monetary policy has to act. With regard to repo rate actions, if you look at other central banks, 50 bps has become the new normal. And, quite a number of central banks are hiking rates by 75-100 basis points. In RBI, we take a very calibrated and measured view. We factor in the impact of the rate action on growth and consumer demand.

Has the impact of the past two rate hikes been factored in the inflation forecast?

Patra: Once a rate action is taken, it’s a fact and we will use all facts to make our projections. We do not take into account prospective actions. So, in that sense, it is a baseline scenario. The baseline scenario includes the fact of us having acted before.

What is going to be RBI’s response in terms of liquidity when there is a strong economic recovery and huge current account deficit?

Das: We will do two-way operations for dealing with the liquidity situation that is prevailing. Last month, there was a sudden squeeze on liquidity because of very high GST (goods and services tax) and other tax collections. Therefore, we condu­cted the fine-tuning operation of injecting repo operations of three-day maturity. Our effort will be to ensure there is adequate liquidity.

How much did the movement of currency weigh on the MPC’s decision?

Das: The monetary policy is an inflation targeting framework while keeping in mind the objective of growth. Therefore, it is the inflation growth dynamics, which is the primary factor that determines monetary policy actions. Exchange rate indirectly may come in because rupee depreciation leads to imported inflation.

Do you want to frontload and come to positive real rates? How does RBI look at the neutral rate?

Das: Negative interest rates are a matter of concern and that is something which obvio­usly engages the attention of the MPC during its discussions. On frontl­oading, I cannot spell out because it will depend on the evolving dynamics. There are two aspects to it: bringing down inflation closer to the target and factoring in growth.

Patra: During the pandemic, there was one moving part: inflation was high and policy rate was low. Now, there are two moving parts: policy rate is rising and inflation is likely to fall.

What gives you confidence that the CAD will be modest and ustainable?

Patra: The CAD for the year as a whole cannot be assessed on the basis of one month’s trade deficit. The small decline in exports is because petroleum product exports have slowed down. The government has immediately responded by reducing the export tax and also windfall tax. And, we expect the exports to be back on track. In imports, the average price of oil, which we announced in the MPC, was $105/barrel. However, today it is trading at $94 and all commodity prices are easing. So, we expect a lot of easing on the import front. FDI is higher than last year and portfolio flows have started coming back in a big way. Trade credit is strong and we have enhanced the opportunity in ECBs (external commercial borrowings), and NRI deposits are also being liberalised. So, I think CAD is eminently financeable.

What is the definition of volatility that RBI has in mind when it comes to rupee?

Das: Volatility will basically mean the level and the degree of swing that the ball takes.

Patra: We don’t have a level in mind. And, volatility is usually defined in terms of some measure of variance. And, variance by definition is departure from the mean. So, we watch the departure from the mean and calibrate our actions.