Reserve Bank of India (RBI) Governor, on Friday, said the Indian economy is an island of macroeconomic and financial stability in an ocean of high tension and uncertainty.
“The economic growth is resilient. All these (macroeconomic and financial stability and resilient economic growth) were possible despite two black swan events happening one after the other and despite multiple shocks,” he said at a post-policy press meet.
In the bi-monthly policy review, all six Monetary Policy Committee members on Friday unanimously voted to up the policy repo rate by 50 basis points, from 4.90 per cent to 5.40 per cent.
All members, except Jayanth R Varma, voted to remain focussed on withdrawal of accommodation to ensure that inflation remains within the target going forward while supporting growth.
CPI inflation peaks
The Governor noted that at this point of time, there are signs that CPI inflation has peaked. And, it is expected to moderate going into the fourth quarter of FY23 and the first quarter of FY24.
“But inflation still remains at uncomfortably or unacceptably high levels, and there are also several uncertainties clouding the outlook Therefore, monetary policy has to act.
“…Steps have to be taken to contain inflation and inflation expectations. The resilient economic activity gives us the space to act. And, the aspect of growth is always taken into consideration, and is always factored in in MPC’s deliberations as well as its decisions,” he said.
On liquidity, Das observed that the excess liquidity, which the banking system had, is gradually being brought down. There will be two-way fine-tuning operations with regard liquidity, based on the evolving situation to ensure that there is adequate liquidity in the system.
Current account deficit
On current account deficit (CAD), Das underscored that it is expected to remain within manageable limits and RBI has the ability to finance the CAD based on its assessment.
“The forex reserves remain strong and the RBI will effectively deal with excess volatility of the exchange rate. The umbrella remains strong,” he said.
On whether CAD can be financed, Deputy Governor MD Patra, observed: “Foreign Direct Investment is higher than last year. Portfolio flows have started coming back in a big way.
“On August 1, we got portfolio inflows of the amount equal to whole of July. Trade credits are strong. In the case of External Commercial Borrowings, we have enhanced the opportunity for accessing it….I think, it [CAD] is eminently financeable.
Das observed that monetary policy will be calibrated, measured and nimble, depending on the unfolding dynamics of inflation and economic activity.
“The focus will remain on ensuring safe and soft landing for the economy. It is once again a whatever it takes approach for the RBI going into a third year. We had it in the first and second year of the pandemic and also now, given the challenges that we are confronted with,” he said.
To a question on whether rate hikes in quick succession will impact demand, Das emphasised that inflation still remains at 7 per cent, which is unacceptably high.
“And even according to our projections, they remain above 6 per cent for the first three quarters of the current year. The fourth quarter projection is 5.8 per cent. So, with that kind of inflation trajectory, obviously monetary policy has to act,” he said.
50 bps hike: new normal
With regard to the repo rate action that MPC has taken, Das said: “If you see it in a comparative perspective, although our decisions are primarily driven by our domestic factors and situation, but if you look all around [other central banks]…today 50 basis points…has become the new normal.
“And quiet a number of central banks are now hiking by 75-100 bps…But, in the RBI, we take a very calibrated and measured view, factoring in the impact of the rate action on the aspect of growth.
“So, the aspect of growth and the aspect of rate hike on our demand (overall consumer demand — urban and rural) all that is always factored in and based on that we have taken a balanced call, based on the prevailing and expected inflation dynamics,” the Governor explained.
On deposit growth lagging credit growth, Deputy Governor MD Patra said there is very aggressive deposit mobilisation, starting with bulk deposits. “And we expect deposit mobilisation to catch up with credit growth very quickly,” he added.
Das said the most likely scenario is that the impact of the repo rate hike will be passed on by the banks to the deposit rates. Already, the trend has started.
“Quiet a number of banks have increased their deposit rates in the recent weeks. And that trend will continue because when there is credit offtake, obviously the banks can sustain and support it only if they have higher deposits. They cannot be relying on central bank money on perennial basis to support credit offtake. They have to mobilise their own resources,” he said.
To a question on how much did currency movement weigh on MPC’s decision, the Governor said the monetary policy is an inflation targeting framework while keeping in mind the objective of growth.
“So, therefore, it is the inflation-growth dynamics, which is the primary factor that determines monetary policy actions. Exchange rate, indirectly, may come in because it leads to Rupee depreciation and imported inflation.
“So, its [currency movement] impact on inflation is definitely a factor but the rate, per se, is not a factor for the MPC to really deliberate upon or base its decision on the exchange rate,” he said.