Monetary policy review: We want to withdraw ultra-accommodation, says RBI

We are watchful and the situation is dynamic and fast changing and all our actions will be tailored accordingly, says Shaktikanta Das

After the monetary policy committee (MPC) meeting, Reserve Bank of India Governor Shaktikanta Das, Deputy Governors Michael Debabrata Patra, T Rabi Sankar & Rajeshwar Rao spoke on various issues, ranging from the liquidity management stance of the MPC to the future of non-banking financial companies, at a press conference. Edited excerpts:

Does the next step involve moving to a neutral stance? Why did the RBI bring the standing deposit facility (SDF) now? Is it to allow the non-banks to participate?

Das: For non-banks, there is no such proposal.

Patra: We had taken the policy repo rate to an all-time low of 4 per cent. If you adjust it for the inflation target, then the real policy rate is zero. That was ultra-accommodation. Now that the situation is changing and inflation particularly is at risk, we want to withdraw the ultra-accommodation but we still have scope to remain accommodative. We chose to introduce the SDF from a position of strength. To give you an example, now, we are absorbing liquidity because of government spend. That is the magnitude of the shift so it was opportune to introduce it now. Going forward, it prepares us for both sides of the situation. One, as you are seeing right now, we are absorbing huge amounts of liquidity.

Will the monetary policy become neutral only when liquidity becomes neutral? You are perilously close to crossing 6 per cent inflation for three quarters in a row. So, what will you do?

Das: We are watchful. The situation is dynamic and fast changing and all our actions will be tailored accordingly. All instruments are on the table. So, we are watchful of the emerging trends, how the war progresses and how commodity and crude oil prices behave in the coming months. And whatever actions are warranted, we will take them. Liquidity becoming neutral is dependent on many factors. It will depend on credit growth, pace of government spending and capital flows. Therefore, at this point in time, I would not like to freeze my options. Considering all the variables, we will take appropriate actions.

There are four rates now. What is the utility of the fixed rate reverse repo now?

Patra: The fixed rate reverse repo is there because the RBI stated in the policy that there is no instrument which is off the table. But we have specified that it will not be there for everyday use of liquidity management. It will be there for purposes which we will decide from time to time. Liquidity management will effectively be with the liquidity adjustment facility (LAF). The LAF has three rates — marginal standing facility (MSF), SDF and the repo, with repo being at the centre. So, we are getting back to that system. In the process, the reverse repo is kept there because it has no use for liquidity management as of now. But if we find a purpose for it, we will announce it and use it.

What is the reason for not using the reverse repo?

Das: SDF gives us greater flexibility in implementing the monetary policy objectives. It is uncollateralised and we are not constrained by the stock of liquidity that we have or don’t have for various liquidity management operations. Consequently, it is also an instrument of financial stability. It enables us to sterilise liquidity if there is excess build up due to various reasons without the constraint of collaterals. The MPC decides the repo rate from time to time. Now that the corridor is normalised, and if the MPC decides to increase the repo rate, then both the other rates will move in tandem. So, policy repo rate action by the MPC will now be accompanied by concomitant revision of the SDF and MSF rates.

Do you expect the banks to respond by repricing their risks now that you are no longer accommodative? Also, what is the real rate of interest you see for the economy?

Das: The banks will do their risk pricing and how much they will do it is something I can’t say. It’s for the banks to decide.

Patra: For a developing economy which has potential to grow, the real rate of interest should be positive. In the pandemic, that state was abandoned all over the world and people took interest rates down to even negative levels. Now, I think, it is premature to work out a real rate of interest because there are not enough data points. But we have started a process, a focus on withdrawal of accommodation.

What is the future of NBFCs, given the regulations governing them are being increasingly harmonised with the banking sector?

Das: Our main focus is promoting and strengthening financial stability. Given the scale-based regulations that we have introduced for the NBFCs, and given our current status for the bank licensing policy, it is for the large individual NBFCs to take their own commercial decision regarding their future.