Thursday’s RBI Policy outcome surprised the market not just by pausing on rates but also revising the FY24 GDP growth outlook upwards. Citing an effective rate increase of 290 bps, including the first action on SDF (Standing Deposit Facility), and the 320 bps increase in overnight call rates over the last year, the central bank chose to pause to assess the cumulative impact of its actions taken so far. The officials though reiterated that they remain watchful and will not hesitate to take further action if deemed necessary to ensure financial and price stability. Excerpts from the post policy interaction with Governor Shaktikanta Das and the Deputy Governors T Rabi Sankar and Michael D Patra.
In cricket parlance, is the pause like watching a good over and then playing the shot later?
Das: It will depend on each ball. Monetary policy is always forward-looking; we are watchful of the impact of the actions taken so far, and the many other external developments — both with regard to inflation and growth. We will take further action whenever we think is appropriate.
At what point will the RBI concede that using the interest rate alone to tackle inflation has limitations?
Patra: In the fight against inflation, interest rate alone have not been used. They have been used in conjunction with supply side measures because alongside demand pressures, there have been multiple overlapping shocks on the supply side. Then we have an assignment where regulatory macro-potential policies are assigned to financial stability, so they are separate tools which ensure that banks are sufficiently buffered against the kind of shocks that we saw.
Does the pause imply that the RBI will need to hike rates if CPI inflation proceeds as per the assessment?
Das: Given the confluence of prevailing factors, we have taken this policy decision. The average inflation for FY24 is 5.2 per cent and our target is 4.0 per cent; we will work towards that. With so many uncertainties remaining, it would not be possible for me to make assumptions beyond that. As in a game of chess, we keep thinking about our forward moves and we will act when the time arises.
Patra: Relative to the last meeting, we are much better off. At that time, we were 0.9 percentage points above the four quarters ahead rate and today it is 1.3 percentage points. Economic theory says that if you are a disinflationary central bank, you should react more than proportionality to the change in inflation and we have achieved that in this meeting.
What is the rationale for revising the growth forecast?
Patra: You should see the forecast as compared with the estimated actual for FY23. We are actually downgrading our growth outlook for FY24 by 50 bps to 6.5 per cent. The 10 bps upward revision is due to one important change in the oil price assumption from $90 to $85 per barrel.
But is that not contrary to the expectation of rise in prices due to OPEC cuts?
Das: $85 per barrel is the average for the whole year. Today, the prices have gone up to $85 or just a little below. But this assumption is for the whole year, which has just started. Therefore, we have to wait and see and we have reasons to believe that it will be around this level.
What is the progress on internationalisation of the rupee?
Sankar: We are seeing interest, but volumes are not picking up as much; but those are teething issues that need to be worked out. Interest from countries and other central banks is gradually increasing and so is the number of foreign banks that are opening those accounts. But this is a long-term objective and we have to build towards that.
Das: Stakeholders on either side are adjusting as it’s a completely new paradigm for importers and exporters from both sides, India and the other country. So it is something which we expect will improve steadily.
Will headline align to core rather than the other way round?
Patra: We have done a lot of research and we find that headline aligns to core over a period of time in specific circumstances. If there is abundant liquidity, headline aligns, but if there is a liquidity shortage, then it happens the other way around. Our sense is that both will moderate towards the 4 per cent target.
Do you still believe the 4 per cent inflation target will be achieved in FY25?
Patra: We do inflation forecast targeting. The moves so far have started to take effect — credit is slowing and rate sensitive sectors are already showing the impact of monetary policy. As we progress with this cumulative action, it is possible that the forecast path will change towards the 4 per cent which we hope, and that is what we will review in the next meeting. The baseline forecast suggests that we will reach 5.2 per cent by the end of FY24, absent today’s action.
Will you achieve withdrawal of liquidity by the end of FY24?
Patra: Liquidity has already flipped, we are already into repo transactions. The main operation became a 14-day repo followed by a fine tune. At the current time, the government spending is so much that the system is flush with liquidity, SDF has gone up to nearly ₹3-lakh crore, so we will see as it goes.
Despite the big revision in crude prices, does the slight change in inflation forecast indicate that inflation management will be difficult?
Patra: The big change in forecast is actually in the second half of the year. You can directly link that with what is happening right now as the high inflation will result in a base effect playing out.
By when will the portal for unclaimed deposits be rolled out?
Sankar: The portal for unclaimed deposits and accounts which are transferred to the DEA Fund maintained by RBI, is expected to be ready in 3-4 months.