RBI policy: 'Inflation target sacrosanct for us, not in abeyance at all'

RBI Governor Sanjay Malhotra said the 4% inflation target remains sacrosanct, while stressing a data-driven approach amid supply-side risks and uncertainty

Following the Monetary Policy Committee’s decision to keep the repo rate unchanged and retain the “neutral stance”, Reserve Bank of India Governor Sanjay Malhotra, along with Deputy Governors Swaminathan J, Poonam Gupta, Shrish Chandra Murmu, and Rohit Jain, addressed the media on the policy announcement and the concerns on the economy. Edited excerpts: 

   

What kind of flows are you expecting from foreign currency non-resident (bank) accounts, external commercial borrowing (ECB), and the other measures announced?  Malhotra: We are not targeting any particular amount, but we expect healthy flows from ECBs and the other measures. We expect healthy flows not only during the three- to four-month window we have provided for ECBs and deposits from foreign currency non-resident (bank) accounts, but also from the other measures relating to equity and government bonds. Together with earlier measures such as the liberalised ECB framework and the government’s initiatives, including trade agreements, we are confident of a better balance of payments this year.

 

   

Since you have not indicated when the inflation rate will return to 4 per cent, can we assume the RBI has put the target in abeyance for the time being and is focusing on the band (of 4-6 per cent)?  Governor: No, the target is not in abeyance. It is sacrosanct for us. It is the target the government has given us. But it is to be met over the medium term. It is neither possible nor advisable to take action for every deviation from the target, especially when inflation is being driven by a supply shock. We have to watch whether this supply shock persists or wanes. If the inflation rate comes down on its own, we do not necessarily deploy monetary-policy tools, which could have adverse consequences.

   

In a recent interview, you were quoted as saying the rupee was undervalued. What is the fair value of the rupee?

 

Governor: I never said the rupee was undervalued. I said it might be reasonable to think that it was not overvalued. When they look at the real effective exchange rate and other measures, some people say that it is undervalued. We do not have a fair-value target.

   

Given the inflows that may result from these measures, what level of systemic liquidity does the RBI consider appropriate? Do you expect banks to pass on the benefit of lower hedging costs?

 

Governor: Yes, I do expect banks to pass on some of the benefits from hedging support, and that should result in good flows. As far as liquidity is concerned, we will provide the appropriate amount to ensure that the credit needs of the economy are met. We do not target any liquidity level. Over the last two months, we injected about ₹2.6 trillion.

   

Are you considering measures — such as restrictions on remittances or overseas investment — to slow capital outflows?  Governor: No such measure is being considered now.

 

Why has the concessional forex swap facility for ECBs been restricted to public-sector entities and not extended to private companies?

 

Governor: Public-sector entities are a special category. They operate in areas where the needs of the economy are greater, particularly infrastructure and public utilities. The benefits are, therefore, passed on to a much larger section of society. If the facility were extended to private entities, the benefits would not be as widely dispersed.

 

The RBI has raised its inflation forecast by 50 basis points. Does this strengthen the case for a rate increase?

 

Governor: Inflationary developments are more adverse than they were previously. Whether that strengthens the case for a rate increase will depend on many factors. If it is a one-time increase, you can look through it. But if inflation becomes generalized and persistent and starts getting embedded in expectations, then there comes a time to act. For now, we have to wait and watch.

 

Now all these measures are in place. You think there is a case to continue or discontinue the $100 million net open position (NOP) cap on banks?

 

Governor: No, there is no change. Whatever is there is there. There is no proposal to discontinue with what we had announced and what we have implemented.

 

Which is that one risk that you are watching closely right now?

 

Governor: Uncertainty stems from several factors — the conflict (in West Asia), its duration, and the time supply chains will take to normalise. There is uncertainty around the monsoon. All these factors have implications for both inflation and growth, and we will be monitoring how they evolve and what impact they have. At this stage, the primary concern is the uncertainty surrounding the duration of supply disruption and their impact on prices.