Monetary Policy focused on improving rate transmission: RBI bosses

After the policy meet, RBI Governor Shaktikanta Das and deputy governors N S Vishwanathan, Michael Debabrata Patra, and B P Kanungo spoke to the media on several issues, including the introduction of LTRO and possibility of rate cuts going ahead. Das also clarified that at the moment there is no plan to monetise government deficit. Edited excerpts:

You have come up with LTROs of Rs 1 trillion and have exempted cash reserve ratio (CRR) for banks for incremental retail credit. Is this a kind of hidden interest rate cut?

Shaktikanta Das: Basically, it is an effort for better monetary policy transmission because we are giving it at the policy rate. So, the Rs 1 trillion we want to inject into the banking system will enable banks to reduce their lending rates. 

Will LTRO replace OMOs? Also, any detail on the inclusion of Indian bonds on indices?

Das: The LTROs are not intended to replace the OMOs. So, the idea is to somehow reduce the cost of funds for the banks for on-lending. That is why it is at the repo rate. Also, it gives them an assurance of durable liquidity in their hands and this should encourage the banks, especially when they are seeing that deposit rates are rigid downwards. 

The Budget announcement that certain government bonds will have no limit with respect to non-resident participation reflects the robustness of the Indian economy now that we can accept higher foreign investment, mobilise higher foreign capital to meet our domestic requirement but that will flow in terms of rupees and not dollars. To considerable extent, foreign savings are being mobilised to meet our domestic requirement. Therefore, the pressure on the domestic savings to meet the requirements of the government is also minimised. 

You are saying you can’t reduce rates due to inflationary pressure. But liquidity is in extreme surplus and continues to be so and between December and February you have introduced the Operation Twist. So, what is the broader framework of policy you are operating in and what were you trying to achieve with the Operation Twist?

Das: The surplus liquidity is there to ensure better monetary policy transmission as notwithstanding our 135 basis points, there has to be adequate liquidity. So, it’s only from June that the system became adequate in liquidity. Operation Twist is an instrument used to ensure better monetary policy transmission. The corporate bonds are benchmarked to the lending rates in the government securities segment. So, by operation twist if we are able to soften the yields on government securities at the longer end, then that acts as a benchmark for corporate loan rates. So, the effort was to ensure better transmission to the corporate bond market not so much to manage the yield on government securities.

The three-year repo is supposed to improve transmission. What happens if a bank borrows at 5.15 per cent and one year down the line you increase interest rates? Will the banks be obliged to pass on the rates? Under the FRBM Act, once the trigger clause is exercised, the government can also monetise their deficit. Is that a concern for you?

Das: At the moment, there is no such plan of monetising the government deficit. The increase in borrowing in the current fiscal year, despite the fiscal deficit going to 3.8 per cent, remains the same and in the next year the increase is only by Rs 70,000 crore. And, if it is calculated as a percentage of GDP, then it is lower than the current year borrowing.

N S Vishwanathan: This is a liquidity management thing that we are getting into. The banks will have to take a call as to what they see as the three-year interest rate scenario. But currently, what we are looking at is if the banks are just borrowing overnight then it comes back to us overnight into the reverse repo. So, we want them to borrow for a longer tenure which will move in the form of lending. 

Michael Patra: These three-year repos will be given at the current policy rate of 5.15 per cent. So, repo locks that in. If we change the policy rate and undertake repos at that time, they will be at different rates. So, banks will get funds at 5.15 per cent, whereas the average cost of funds taking into account the deposits is higher. 

Das: The banks will take in whatever they require. It’s an option that we are giving to the banks. 
 

Will the hike in deposit insurance increase cost of funds for banks?

B P Kanungo: The deposit insurance cover has been increased from Rs 1 lakh to Rs 5 lakh. The premiums will increase 10 paise to 12 paise per Rs 100 for the time being. The impact on bank’s balance sheet is not likely to be much.   

The government is converting Rs 2.7 trillion from short to long bonds. Does that mean the RBI will be supporting the government borrowing programme through Operation Twist?

Das: The objective of Operation Twist is to facilitate the transmission to the corporate bond segment and not to manage the yield for the government or supporting its borrowing programme. But, as the debt manager of the government, the RBI always has to ensure that the government borrowing programme goes through in a non-disruptive manner.

Is there space to cut rates?

Das: We have policy space, but it will depend on the evolving situation and as the MPC was proactive in 2019, it will be very, very proactive even in 2020.