A 'no-brainer': RBI governor Shaktikanta Das on expected rate hike in June

Says have entered another phase of 'coordinated action' between fiscal and monetary authorities

Reserve Bank of India (RBI) Governor Shaktikanta Das made it amply clear on Monday that the monetary policy committee (MPC) during its meeting in early June will look at increasing the policy rate or the repo rate once again, after the 40 basis points off-cycle hike in May, to bring down headline inflation that has remained above the central bank’s upper tolerance limit for four months.

“I have said that one of the reasons for the off-cycle meeting in May was that we did not want a much stronger action in June. The expectation of a rate hike is a no-brainer. There will be some increase in the repo rate but by how much, I will not be able to tell now”, said Das during an interview with CNBC TV18.

The MPC is expected to meet from June 6 to June 8. The May repo rate hike was the first rate hike since August 2018. The rationale for raising benchmark rates in an off-cycle MPC meeting was the upside risks to India’s inflation trajectory. The headline inflation number has been over the RBI’s tolerance limit since January 2022, and in April it stood at 7.79 per cent. Last week, the Centre slashed central excise duty on petrol by Rs 8 per litre and on diesel by Rs 6 litre in a bid to ease retail inflation.

“We have entered another phase of coordinated action between the fiscal and monetary authorities to check inflation. The RBI has taken a number of steps… Now the government has taken action. All this put together will have a sobering impact on inflation going forward,” he said.

The excise duty reduction on petrol and diesel was announced over the weekend and the RBI is back to the drawing board so that it can revise its inflation projections, the governor said. 

In April, the central bank raised its inflation forecast for the current fiscal year to 5.7 per cent, from the earlier estimate of 4.5 per cent, and lowered its GDP estimate to 7.2 per cent, from 7.8 per cent, for 2022-23, citing the impact of escalating geopolitical tensions triggered by the Russia-Ukraine war.

Interest rates in almost every country today are negative, except Russia and Brazil, Das said. “We will move towards positive real rates, but how soon that will happen will be dependent on the evolving situation,” he said.

On the RBI’s plans to bring down the overhang of excess liquidity in the system, its governor said: “Our position on liquidity is that we would like to normalise liquidity, remove the overhang of liquidity in the system, and move to a situation where there is adequate credit available in the system to meet the productive requirements of the economy and support the credit offtake which will happen”.

“We want to avoid a liquidity trap. Hence, all our liquidity intervention had a sunset date,” he added.

The RBI had announced total liquidity support of Rs 17 trillion, of which the actual offtake was Rs 12 trillion, and of that Rs 5 trillion has already been returned. The rest Rs 7.5 trillion remains in the system, of which in the overnight SDF, the RBI gets back about Rs 2 trillion and the rest is in the VRRR.

On whether the frequent rate hikes by the central bank will push up the likelihood of non-performing assets (NPAs) of banks going up, Das said: “This can become a problem, hence it calls for greater watchfulness”.

“I have had meetings with public and private sector banks, and the banks are fully sensitive to the need to monitor the NPA levels very closely. The collection efficiencies have improved across banks. Banks have raised substantial capital during Covid and going forward, various banks have their capital raising programmes,” he said.

On the recent pressure on the rupee which has depreciated around 4 per cent in 2022, he said the RBI will continue to curb excessive volatility in the foreign exchange market and that it does not target any particular level of the rupee.

Domestic bond yields resumed their upward journey after the Centre on Saturday slashed excise duties on petrol and diesel, which is expected to impact the government's borrowing maths. The yield on the 10-year government bond settled 3 bps higher from the previous close, while the rupee closed marginally stronger against the dollar.