Inflation forecast will drive rate action, says RBI governor Shaktikanta Das

You had said that the May 4 interest rate hike was the beginning of reversal of the cuts. The next meeting of the monetary policy committee (MPC) is due on June 6-8. Is there a temptation to do the remaining 75 basis points in one shot?

I can’t say what the next MPC will decide. After discussion we take decisions. We have said that whatever we do will be in a phased and a calibrated manner. To the extent possible, we will avoid shocks to the market and to the financial sector. The off-cycle meeting (was) treated as a surprise. It should be seen as a continuation of the April MPC. In April, apart from changing the sequence of inflation and changing inflation projection, we made the LAF (liquidity adjustment facility) corridor symmetrical and normalised to 50 basis points and a change in stance. One significant thing was we introduced the SDF (standing deposit facility) and fixed it higher than the reverse repo rate. The weighted average call rate, the operating target of monetary policy, was closer or lower than the reverse repo rate. The moment we did that, the call rate went up by 40 basis points. There was a rate action. I had said the situation is fast changing and dynamic and our actions will be tailored accordingly.

The market is obsessed with the repo rate being raised to 5.15%. How accurate is that?

You can’t precisely pinpoint that it will be 5.15%. What we have said is we would like to return to the pre-Covid situation – in terms of growth, repo rate, and liquidity. It is not possible to be precise. It can be lower or higher.

Central banks are grappling with how to tackle inflation. How high should interest rates go?

We are committed to containing inflation. At the same time, we have to keep in mind the requirements of growth. It can’t be a situation where the operation is successful and the patient is dead. We will have to bring down inflation and we can’t afford such a big growth shock which will adversely affect inflation. It has to be a balanced call with inflation control as priority.

Almost all central banks are focused only on inflation. But you are having growth also as your concern. What kind of imbalance could that cause in the economy, markets?

Our focus is on inflation containment. While doing so, we can’t push out growth from the table. All the central banks are also trying to take a similar stance with their domestic situation. All of them are also mindful of the growth aspect. Ultimately, it is the economy. It is the welfare of the people that is important. High inflation is definitely against the welfare of the people. When you are bringing down inflation, you are contributing to public welfare. It is a difficult, delicate balancing act that each central bank has to do based on their assessment of their economies. In RBI, we will take a balanced call.

The government has taken some fiscal measures such as cuts in fuel taxes and that should moderate inflation. Can that lead to less aggressive policy actions by the RBI?

We are assessing the inflation road map. The steps would be factored in. We will give out a revised forecast in the next MPC. Depending on the forecast which we come out with, the MPC will take a decision on further rate action.

The US Federal Reserve minutes suggest sharper and more 50-basis-point increases. What is the kind of magnitude of increase that India would require?

When I’m talking about growth, (it) is that I can’t forget about the requirements of growth. But our primary focus at the moment is to bring down inflation closer to the target.

Why is there such a divergence between the wholesale price index (WPI) and the consumer price index (CPI)?

The passthrough depends on producers’ prices. In certain sectors, full passthrough hasn’t happened. Going forward it may happen. There are signs that in many sectors, the passthrough to retail prices is taking place.

The off-cycle rate hike came as a shock after there was no action in April, despite a higher inflation forecast. Also, you had said that actions would be well-telegraphed.

I said it would be ‘well-telegraphed’ before April. One more month of inaction would have resulted in a further spike in inflation without any action from the central bank. And also, it would have ended up in a much stronger action in the June policy. That would have been a real shock. It’s not good to do such a strong action in one meeting. There may be a situation where it may be required, but in the current situation, it was not desirable.

In the latest MPC minutes, JR Varma had suggested a 100-basis-point increase soon. How quickly can we expect that?

Individual members give their views. Ultimately, it is discussed at the next meeting. Each member takes his position and then if there is unanimity, well and good. If there is no unanimity, it is put to vote. You can see the thinking of individuals, but you can’t decide what the MPC decision could be.The government has taken some supply-side actions. There have been movements internationally – be it crude or some commodities. The next policy action will be dependent on what inflation forecast we make, based on the developments of the past month and what kind of outlook it gives us for the future.

There appears to be a disconnect between the inflation forecasts and MPC actions. When you raised the inflation forecast by 120 basis points, there was no rate action? How well can action be tailored to forecasts?

I would not agree with that. I had listed many points – we changed the inflation projection. We changed the stance to focusing on withdrawal of accommodation. We made the LAF corridor symmetrical, prioritised inflation. We introduced SDF, which was a rate action. On top of that, a further repo rate action would have been too much of a shock to the market. Having taken so many measures, it would have meant an 80 basis-point increase. It’s not as if in April we made up our minds for another 40 basis points increase. The developments thereafter, the forecast given by the FAO (Food and Agriculture Organisation) and the World Bank showed that it (inflation) is becoming more sticky, and

.

And it is spreading to broader segments of the economy?

Core inflation is becoming sticky. There were increases in electricity tariff and the prices of essential medicines, reset in April, also went off. The war is here to stay and last longer. Therefore, the developments during April also necessitated that we act early. It was evident that a rate action would be necessary. We had given signals there could be off-cycle meetings with (the) situation fast-changing. We did give a forward guidance – April, we started the rate action. The developments during April necessitated a rate action. We wanted to avoid a stronger action. Putting all these together, an off-cycle meeting became necessary.

Does that mean in future too there won’t be huge increases even if there are severe price pressures?

I would not like to prejudge the MPC’s decision. To the extent possible, we would avoid any shocks to the market.

You dropped the word transitory to describe inflation. There was an argument that supply-side inflation can’t be controlled by rate hikes. Now all the central banks are doing it. What has changed?

Inflation all over the world has become generalised and persistent. Even now, the inflation is due to the supply side and not due to monetary policy. The current war in Europe has made inflation much more generalised, much more persistent. There are certain global factors which are not under the control of any single country. When it came to Covid, there was co-operation. Today, we don’t know which direction countries are pulling. Therefore, inflation has become persistent. The war is likely to last longer, therefore the central banks have to act. Also, growth has made a substantial recovery. In India, we have returned to pre-Covid levels. There are clear signs of demand revival and private consumption. There are also indications of a pickup in private investment. Our growth scenario looks far more comfortable and better than other countries. Anchoring inflation is more important, otherwise it will go out of control.

Now that the rate upcycle is a reality, what is the threat to growth?

Let us not assume that the rate increases would continue endlessly. There may be positive developments on the geopolitical side, I don’t know. Even Covid appears to be in control, but some countries are still facing a severe spread. There are so many uncertainties. The situation can move in either direction. It appears that inflation will stay for some more time. Each central bank has to take its own call based on the local situation … (in) advanced countries, the (inflation) target is 2% and it (current inflation) is at 6 or 7 or 8%. For them, it is a bigger worry. In India, 7.8% against our upper tolerance band of 6%. India is better off. On the growth front also, India is still projected likely to be the fastest growing economy.

The government has cut taxes on fuel. Its subsidy bill is also climbing which may lead to higher borrowings. How do you manage bond yields?

The actions, whether they will lead to additional borrowing … we can’t assume there will be additional borrowing. Under certain heads, expenditure goes up and under certain heads, it comes down. We are in the beginning of the year. The revenue numbers are good. The disinvestment target looks achievable. There could be more inflow of resources, tax and from other sources. There is excess demand for subsidy, there could be savings elsewhere. The government is also mindful of the fact that the fiscal deficit has to be maintained. Debt-to-GDP also has to be kept in mind. The RBI is the debt manager. It is our endeavour to ensure non-disruptive completion of the borrowing programme. I have said the evolution of the yield curve is a public good. Thereafter, both the RBI and market participants have a good understanding. There has been convergence of thoughts.

The RBI intervenes in markets actively. But there seems to be a divergence in your approach to the currency and bond markets. While in currency you don’t have a level, when it comes to yield, you seem to be particular about levels?

Both in the currency and bond markets, we don’t like runaway prices. In the currency market, we don’t like runaway depreciation and in the bond market, we would not like a runaway increase in yields in G-Secs.

Coming to the banking system, their financials are looking better and you had taken many steps. Can we say there won’t be a repeat of an IL&FS or a ?

That is our endeavour. We have taken many reform measures – governance guidelines, scale-based regulation for NBFCs (nonbank finance companies), for MFIs (microfinance institutions) activity-based regulation, soon for ARCs (asset reconstruction companies) and urban cooperative banks and digital lending. We have mandated appointments of risk and compliance officers. Even NBFCs are in a stronger position. Banks’ CRAR (capital-to-risk weighted assets ratio) is more than 6%, GNPAs (gross nonperforming assets) is less than 6% and PCR (provision coverage ratio) is 69%. The banking sector remains quite robust. The financial health of all banks is stable. All the banks are in a healthy position.

Is it fair to say that the proposal to let industrial houses own banks is in cold storage?

There was an internal working group report. We examined it. We reached a conclusion that at the moment we would keep it for further examination.

Given the state of crypto values, will it be fair to say that you have won the argument?

It is not a question of winning or losing. There is a lot of discussion. The government will take into account all viewpoints and decide whether to regulate or ban. Crypto has no underlying. You cannot regulate nothingness. There has to be something to regulate. The prices can be volatile. In fact, it is a purely speculative activity. I am not using a stronger word, to call it gambling, but it is a speculative activity. It can create a situation where small and retail investors would lose money and could lose confidence in the financial system. In share prices, there is an underlying company which is regulated by the company law. Look at their prices, they have crashed.

On the fintech space, there is a demand for credit through the UPI (Unified Payments Interface) platform… What is your view?

Let the UPI do what it is meant for – a payment and settlement system. Let it do more and more efficiently, which it is doing at the moment. Let the UPI go international, which is our focus area and NPCI’s. Let there be linkage between the UPI and other countries’ payment systems. Let it even penetrate further in the country. The banks will have to undertake digital lending. We have come up with digital lending plans.

Private banks have almost stopped issuing Rupay cards because of the zero MDR charges. It is indirectly helping competitors. What is RBI’s stance?

The government has decided to subsidise. We are engaged with banks on this issue, about issuance of Rupay cards, particularly in the context of the geopolitical development and recent experiences. It is desirable that we also have a domestic card Rupay which can also be transacted outside the country. We are working with other central banks (for it) to be acceptable. We are engaged with the NPCI and banks.

Where are we in terms of sanctions against Russia?

India has not violated any sanctions. We at the RBI will adhere to sanctions. The payments are going on. Importers and exporters have found a way for settlements.