'We expect a hike in deposit rates', says RBI Governor Shaktikanta Das

After a surprise rate hike in May in an off-cycle meeting, the six-member monetary policy committee of the Reserve Bank of India (RBI) on Wednesday unanimously voted to increase the benchmark policy rate by 50 basis points, thereby taking the repo rate to 4.9 per cent. After the policy meeting, RBI Governor SHAKTIKANTA DAS, and Deputy Governors MICHAEL PATRA, RAJESHWAR RAO, and T RABI SANKAR spoke to the media. Edited excerpts:

Given that the inflation projection is at 6.7 per cent for 2022-23, will the RBI be aggressive in hiking interest rates?

Shaktikanta Das: Our future action will depend on evolving inflation/growth dynamics. The situation is fast changing, and it will depend on how the state of affairs evolves.

You indicated inflation will be over the 6-per cent tolerance until December. You will be in breach of the 2-6 per cent mandate the entire year. What are the procedures you have to follow for failing to meet the mandate?

Das: In an extremely uncertain outlook, it is not possible to provide forward guidance. With regard to breaching the inflation target framework, we will deal with it as and when the situation arises.

In the speech, you said you are committed to normal monetary conditions in a calibrated manner. What do you mean by ‘normal’, in terms of repo rate?

Das: The way the RBI looks at normal conditions is, if you recall the February 2020 liquidity framework we had announced, it was linked to the overnight rates. The critical factor is not the quantum of liquidity or any rate. Currently, even as the overnight rate is below the repo rate, it is still closer to the standing deposit facility rate. Therefore, a normal condition would primarily mean when the overnight rate, called the money market rate, is aligned with the policy repo rate.

How do you calculate a real, positive rate? Do you wish to get there?

Michael Patra: The real rate is always forward-looking like the rest of the monetary policy. We will consider the forecast of the inflation rate sometime in the future within the monetary policy and then calculate the real rate.
 

You have said that the extraordinary liquidity situation will be withdrawn over a multi-year period. Some economists have said liquidity will turn neutral by the end of the year.

Das: We started the withdrawal of liquidity last year by stopping the government securities acquisition programme. We introduced the variable rate reverse repo (VRRR). In the May policy, we increased the cash reserve ratio. A multi-year cycle will essentially mean a two-/three-year cycle.

You have not factored in the rate actions in your inflation projections. How will the scenario change once they are taken into consideration?

Das: Each action takes time to play out. Ideally, monetary policy actions take six to eight months to fully play out. We will watch the evolving situation.

Do you foresee a liquidity deficit scenario?

Das: Liquidity is impacted by many factors. The pace of government expenditure, front-loaded capital expenditure, and credit offtake, which has now improved. If this increase is sustained, liquidity goes out of the system. There are other factors related to the foreign exchange markets which add or drain away liquidity. If liquidity runs into a very heavy deficit, the repo window is always available.

What is the preferred step in terms of managing the government borrowing programme?

Das: We are monitoring the government securities markets very closely. With regard to Operation Twist, we have greater leverage and flexibility because we have enough securities.

Transmission on the lending side has been impressive. But on the deposit side, it’s not been that effective.

Das: Normally, transmission takes time. We expect rate hikes to be transmitted to the liabilities side, viz. deposits. The bank deposit rates are going up. In any case when there is credit offtake, banks need to mobilise greater resources by way of offering higher deposit rates to savers. 

A lot of international merchants say India is too small a market for them to comply with the RBI guidelines on recurring payments.

Rabi Sankar: Since October 1, about 59 million mandates have been registered. The total mandates number 65 million. In these mandates, about 3,450 international merchants have registered. For those with not a very significant India business, they will take a little longer to make investments and adjust their systems.

How comfortable is the RBI with allowing co-operative banks to give larger home loans and enter commercial real estate?

Rajeshwar Rao: The customer demand is met through the measures we have announced. These are subject to prudential safeguards in terms of ceiling, prescription of limit, etc. We are in a position to assess the vulnerability of banks closely.