'Don't want to rock the boat': What MPC said after keeping rates unchanged

Post the monetary policy resolution, the Reserve Bank of India (RBI) Governor Shaktikanta Das, and Deputy Governors (DGs) Michael Debabrata Patra, Mayank Jain, M Rajeshwar Rao, and T Rabi Sankar, spoke to the media on several issues ranging from the withdrawal of the G-SAP programme, liquidity management, inflation-growth dynamics, asset quality pressures on banks, and involvement of big tech in banking activities. Edited Excerpts:

What was the reason behind not conducting any more G-SAPs? 

Das: At the moment, G-SAP is not required but going forward, the G-SAP option, together with options of ‘operation twist’, and ‘open market operations’ are very much on the table. At the moment, the total quantum that is coming under our fixed reverse repo window is Rs 4 - 4.5 trillion and I have said that even in the first week of December, the quantum expected under the fixed-rate reverse repo will be in the region of Rs 2 - 3 trillion. Therefore, it is not a steep reduction of liquidity.

As a central bank, would you like to use “surprise” as a policy tool?

Das: There was no surprise. It’s not sudden intervention. The road map, which I laid out for the 14-day variable rate reverse repo (VRRR) auctions...it is Rs 4 trillion today, for which the notification was issued yesterday and every fortnight it goes up by Rs 50,000 crore ending at Rs 6 trillion in the first week of December. So, the overall approach is of gradualism. And, then the deployment of 28 days VRRR and further fine-tuning operations will depend on the evolving situation. So, I would not agree that there is a surprise in what we have done. We have given out a clear, gradual, calibrated roadmap. 

Have the banks revealed all the stress in their portfolios? Do you feel there is a need for a regulatory road-map on climate change risks?

Jain: While banks and other financial institutions have resilient capital and liquidity buffers as has been seen from their balance sheet, we have also seen that the stress has been moderate in spite of the pandemic. We are closely monitoring the build-up of stress in MSME and retail credit. And, RBI is conducting special meetings and discussions with the top management of banks, small finance banks, and NBFCs wherever such stress build-up has been observed. 

With regard to climate risk, I think it is at the nascent stage and debate is going on between the regulator and the government whether it should be in the domain of the government or the RBI. Nevertheless, we have initiated various processes to understand the dynamics of various regulatory policies on climate risk.

Rao: We have recognised the issue of climate risk internally and we have joined the network of greening of financial institutions and also we are joining the various working groups set up under the aegis of NGFS. We have also set up a sustainable finance group internally. The idea is we can look at this issue comprehensively and come out with some kind of a guidance note in a short period of time. 

Can you give us any timetable for inclusion of Indian bonds in the global bond indices? The cut-off for VRRR has come at 3.99%. Should we read it as a signal? 

Das: This matter is in an advanced stage of discussion with the major index providers. Both the RBI and the government are in constant dialogue with the providers. There are few issues but they are getting resolved. They have certain expectations and the government is discussing with the Euroclear Authorities as well as the index providers to clarify those issues. It should happen in the next few months. 

Patra: We are essentially in a passive mode. Having offered the 14-day reverse repo auctions, we will accept what the market gives us, and thereby we will discover the price of excess reserves as indicated by the market. 

What would signal to the RBI that there is a comfort to start moving away from the emergency levels because you cannot pull out this level of liquidity in a knee-jerk fashion? So, why is RBI not starting the process? 

Patra: We would look for signs that the recovery is getting solidly entrenched and that the inflation rate is moving in the desired direction, that is, towards the target. So, we are not looking at destinations but at journeys. Hence, even dynamic movements in these directions will be our trigger. The RBI is following a step-wise approach. The first is the stopping of liquidity; the second is moving liquidity from fixed-rate reverse repo to the auctions. The auctions have two benefits for us: one they enable better pricing of excess reserves and they give RBI a better handle on these reserves by giving more discretion in managing liquidity. On the next steps, let me assure you, RBI has all the adequate instruments. The issue is not of instruments but of timing and calibrations. 

But, 14-day VRRR is not really absorption of liquidity, it is only fine-tuning. Only 28-day VRRR is an absorption tool?

Patra: This step is all about taking it out of the passive fixed-rate reverse repo over which the RBI has less control into the auctions where RBI has more control in determining the pace and timing and sequencing of our measures. So, the first job will be to take into the auctions and thereby get better discretionary control over the reserves. The next steps will follow. 

We are on a resolute pause but at the same time, MPC is saying recovery is happening, inflation is coming down. So, is there some contradiction there? 

Das: No, there is no contradiction at all. Developments around growth and inflation are dynamic and evolving. Going forward in a calibrated manner, without creating disruptions, our endeavour will be to get as close as possible to 4 per cent (inflation target). And, growth has revived in certain segments. There are some high frequency indicators where uptick is visible but there are other high frequency indicators where uptick is not visible. We are looking at growth signs to become entrenched and show signs of durability. RBI is an inflation-targeting body. Let there be no doubt on our commitment to inflation but in the last one and half years, we have been dealing with an extraordinary situation that needed innovative and unconventional measures. Our approach will be gradualism. We do not want to rock the boat more so because we have to reach the shores because it is visible and there is a journey beyond the shores. 

You have mentioned that there is a need for calibration of indirect taxes on fuel. But, there has been no movement on this from the government’s side. Has there been communication with the government? 

Das: On this issue and several other issues where the action lies in the domain of the government, there is constant engagement between the government and the RBI. We voice all our suggestions and concerns from time to time. The government has taken several measures already with regard to pulses, edible oil, and other supply-side factors. On the petrol-diesel front, we have flagged the issues, now it is for the government to consider all aspects and make a decision. 

Banks like SBI have been complaining about mispricing of credit risks due to excess liquidity and lack of credit growth. Is this a worrying trend?

Das: I do not think the State Bank of India (SBI) has flagged this as a complaint. They have flagged this issue as a concern, which is for banks to note. Whatever be the liquidity situation, it is for the banks to do their own risk assessment and price their loans accordingly. So, the action lies in the domain of the banks. 

Is RBI comfortable in allowing tech giants to give their front-end platform to market liabilities products? 

Rao: The entry of big tech into the financial sector is a global phenomenon, which is engaging the attention of central banks around the world. In India too, we are examining the issue from a regulatory implications standpoint.

Penalty on ATMs for downtime has resulted in some banks closing ATMs. So, what is the resolution to this problem?

Sankar: The idea behind the penalty on outages in ATMs was to ensure that ATMs are available as much as possible in areas where the attention to ATMs is less, which is largely rural and semi-urban areas. Having said that, we have received various feedbacks, some positive and some raising concerns. There are specific issues to specific locations. We are trying to take all the feedback and have a review and see how best it can be implemented. But, ensuring that money is available in ATMs is what has made us issue the circular.