Reserve Bank of India Governor Sanjay Malhotra, along with Deputy Governors T Rabi Sankar, Swaminathan J, and Poonam Gupta, addressed a range of issues during the post-monetary policy press conference. Edited excerpts.
One structural change in this policy seems to be that you have started providing the figure for the core inflation rate. While the full-year inflation average rate is 4.4 per cent, that for the second half moves closer to 5 per cent. Should the markets be prepared for a rate increase, especially as liquidity tightens?
Malhotra: This has been a long-standing request from market participants, and we felt this was the right time to introduce it, especially after completing the five-year review. That said, I would not call it a shift in monetary policy. Core inflation has always been tracked internally and we are now sharing the projections.
The monetary policy is not on a pre-set path. Our target remains headline inflation, and we must ensure it stays within the band. At the same time, we do analyse all components of inflation and their drivers before taking a decision.
On the second question, again, there is no pre-determined course. The Monetary Policy Committee (MPC) will assess how various factors evolve. The situation is rapidly changing, and we will take a call based on the incoming data.
One year ahead the inflation rate is projected at 4.7 per cent, implying a real interest rate of around 50 basis points as against an estimated neutral rate of about 1.5 per cent. Does that mean the policy is below neutral? Also, on recent RBI measures to curb rupee volatility, such as the cap on the net open position and restrictions on contracts, are you satisfied with their impact, and could these be withdrawn now that the conditions have changed?
Malhotra: On the forex measures first, there was heightened volatility in late March, with positions building up and creating arbitrage between offshore and onshore markets. While such linkages are useful in normal times, excessive positioning can distort price discovery. These measures were taken to address that specific situation and are not structural. We remain committed to deepening and internationalising the rupee market. So these steps are not permanent.
On the neutral rate, we do not have a precise estimate. The real rate at present is still around 2 per cent, so it is not low. Given the high uncertainties, particularly from supply-side factors, the MPC decided to pause and wait for more clarity before acting.
In February, the guidance was that the rate, barring shocks, would remain low for 9-12 months. A shock has occurred, but there is now some clarity. Would you reiterate that comfort if conditions stabilise?
Malhotra: Our stance is “neutral”. So outcomes in either direction are possible. That said, India’s macroeconomic fundamentals remain strong and resilient. Even with the recent shocks, the growth rate has been projected at 6.9 per cent. It is quite possible that the rates will remain low in the near to medium term, but that will depend on how conditions evolve.
In your projections how long is the West Asia crisis presumed to last?
Malhotra: It is difficult to give a timeline. What matters more for us is the impact on commodity prices, especially energy, and the extent and duration of supply disruption. If supply shocks persist, they can eventually translate into demand-side effects over several months.
Are you seeing any sign of stress building up in banking because of supply disruption, high energy prices, and weak external demand? Is the transmission of the earlier rate cuts into the lending rates and deposit rates complete?
Malhotra: On banks, we do not see any systemic concern regarding their profitability or health. Yes, some pockets or sectors will be hit. Again, it will depend on the extent. The government has done a wonderful job as of now in trying to secure these inputs and reduce supply-chain disruption. It will depend on how long this continues. Against 125 basis points, about 90 basis points is the transmission that we have seen on the lending side. Similarly, on deposits, it is more than 100. So, there has been satisfactory transmission.
Isn’t this growth assumption of 6.9 per cent too optimistic, given the fact that supply-chain normalisation, especially that of gas, takes quite a long time?
Malhotra: No, we do not think that it is too optimistic. However, we have mentioned that there are more risks to the downside rather than to the upside and that would happen primarily for the reasons that you are stating. If there is a prolonged disruption in supplies, which we hope should normalise sooner rather than later, that can put pressure on the assessment of growth at 6.9 per cent. This is a reduction in comparison to last year of about 70 basis points. So, it is not small.
There is a drop in foreign-exchange reserves of about $40 billion over a five-week period. At what point does it start becoming a concern?
Malhotra: We have sufficient reserves. It is not a matter of concern. Eleven months of cover is what we have. This is sufficient. The government has taken measures. We believe this year minus the war would have been much better. Many of the agreements with major economies, including the European Union, are expected to come into effect soon. The agreement with the United Kingdom is already in place, while others, such as with Canada, are in the pipeline. All these should support both the current account and the capital account.
I am not concerned about the balance of payments. This year we expect the repatriations to slow. Gross foreign direct investment is continuously growing.
On some days in the recent past, we saw the weighted average call rate going below the standing deposit facility. Are we going to see any deployment of variable rate reverse repo (VRRR)?
Malhotra: VRRR and durable liquidity address different issues — one is durable and the other is transient. Our attempt is to keep the weighted average call rate as close as possible to the policy rate. However, at times of uncertainty, we want to give comfort to banks that liquidity will not be in deficit. That is why we have allowed it to remain at the lower end. It is still within the liquidity adjustment facility, not outside it. It only gives them the comfort; this should not be taken as a signal for a rate cut. We will give sufficient liquidity proactively and pre-emptively as required to the banking system.
What is the RBI’s view on waivers of farm loans announced by Maharashtra?
Malhotra: On loan waivers our view is that if they are to be given, they should be targeted. They shouldn’t be general sort of waiver. In cases of distress such as natural calamities, relief measures are warranted. We already have a framework for such relief to be accorded in consultation with banks.