'Our endeavour is to bring inflation in line with target over medium term'

RBI Governor Sanjay Malhotra said policy will remain guided by headline inflation and evolving growth dynamics, while reaffirming the central bank's data-dependent approach

Reserve Bank of India (RBI) Governor Sanjay Malhotra, along with Deputy Governors Swaminathan J, Poonam Gupta, S C Murmu and Rohit Jain, responds to a range on questions at the post-monetary policy media interaction. Edited excerpts:

 

The market viewed your policy statement as more dovish than expected. Does this mean the RBI is putting greater emphasis on the core inflation rate? Is the RBI comfortable with a negative, or at least a very low, real policy rate? 

Malhotra: Let me first say that we are neither dovish nor hawkish. This is the right policy for the current situation, given the dynamics and the outlook we have projected. 

 

There is a lot of uncertainty, which will play out over time. Our framework is clear. Our target is the headline inflation rate, not the core inflation rate or any measure excluding specific components. We will continue to be guided by the headline inflation rate. It is our endeavour to bring headline inflation in line with the target over the medium term. 

We look at the core inflation rate because it helps us understand the underlying inflation trend and where the headline rate is likely to converge. The headline rate can be volatile because of food, fuel and external shocks. As I said in the previous press conference, we do not want that volatility to be reflected in the policy repo rate. 

We have seen $40 billion being mobilised by FCNR (B) scheme and yet the rupee has not appreciated much. Is it because you are squaring off your forward positions and the dollar is not coming to the market? 

Malhotra: I think the underlying fundamentals of the Indian economy are strong. There can be an argument, as some people have made, that it is perhaps the nominal or real effective exchange rate terms may be undervalued. There is uncertainty. It is quite possible as the tensions and the conflict de-escalate. It is quite possible that the rupee will further strengthen. It has strengthened over the last one month or so. It has strengthened from 97 levels now to about 95 levels. 

Our policy is built on the premise that the markets determine the price level and the band. We intervene in case there is excessive volatility and there are speculative pressures getting built in. And it will be our endeavour that the trajectory for the rupee remains orderly and there is no disruptive movement. 

What is the impact of the FCNR (B) collections on the RBI’s balance sheet? How do you plan to deal with the swap positions? 

Malhotra: We do swaps. We buy and sell foreign currencies and whatever our reserves are as a result of that, there is a higher-level committee where there are members from the government. We take a call as to how we are going to manage the reserves. This is three principles — the first one is security, the other one is liquidity, and the third one is returns. The liquidity that it will inject is there for a short while. The balance sheet is growing more or less at a normal pace unless you have a flood of unexpected deposits, which we don’t. 

What indicators or developments would prompt the RBI to reconsider its stance? 

Malhotra: Obviously, it is the change in the growth-inflation dynamics — if there is very high inflation, which requires us to raise rates or the other way around. Keep in mind that the primary mandate is price stability. And so if the inflation rate goes up beyond the target, not aligning with it persistently over a long period of time, then it will need large rate increases. We will be data-dependent, and we will remain focused on our primary objective of maintaining price stability and meeting our target of 4 per cent headline inflation rate over the medium term. 

Will there be a cost to AI-related cybersecurity incidents in the banking sector when banks fail to adhere to the April guidelines or are not adequately prepared to counter such attacks? 

Malhotra: The information-technology (IT) systems of our major banks and big regulated entities are robust. They have put in place checks and balances to ensure that they are secure. We have not only issued guidelines and regulations. We have supervision, which is done regularly. Any shortfalls or vulnerabilities are pointed out. Measures to strengthen the systems further are suggested. They are monitored and followed up to ensure that the systems continuously adapt as new threats and vulnerabilities keep coming up with new developments in the IT sector. At the same time, our banks and regulated entities keep preparing and making themselves more secure and more resilient.