RBI will ensure stability in the forex market, says Shaktikanta Das

In a fireside chat with Tamal Bandyopadhyay in November 2021, Reserve Bank of India Governor Shaktikanta Das says challenges of all kinds come with the territory

Sir, welcome, and congratulations. I think no governor in RBI’s 135-year history has got a second term at one go. And you are the second governor to have a six-year term.

Thank you.

How challenging is the job? Roughly half of your first term went into fighting Covid. And many believe that after economic liberalisation, as a governor you have the most difficult task.

For any governor at any point of time, there are a large number of challenges. You have to see the challenges in a particular time context. So, it is very difficult to say which was the toughest. But, yes, this pandemic is once in a 100 years, so to that extent it has been largely challenging.

When I came in, the key challenge for the Reserve Bank was the post-IL&FS crisis period. The financial market, and the sentiment, was quite low. Bringing back the positive sentiment in the financial market — that was one challenge. Inflation, by and large, was around 4 per cent. Growth was beginning to slow down, that is why in the first monetary policy meeting for me, February 2019, we reduced rates by 25 bps. So, after the IL&FS scenario, growth was slowing down, and this is a challenge to overall financial stability. So, from time to time RBI is required to address this particular issue.

Of course, there were other challenges in the banking industry, and then came the pandemic. And, at the RBI, with cooperation of all my colleagues, despite extremely difficult times in terms of restrictions on movements, our effort was to remain as much as possible in sync with the challenges and requirements, and be as proactive as possible.

Almost all the measures which we initiated during Covid times seem to have worked. I believe that a large number of experts share the same assessment. But, challenges will always remain. Even as we speak, the global situation remains dynamic and challenges keep coming up. As a central bank, we have to be as alert as possible to deal with fast-moving global developments.

Till recently, all global bankers were discussing inflation as transient. Now they are calling it temporary. What is your take on inflation in India? You have been talking about cutting excise duty on petrol and diesel. The government did cut duty. That is positive for inflation.

That is significantly positive for inflation. In India, inflation originated from food inflation. It was edible oil, then pulses, and then petrol and diesel prices — they all had their impact. And most of it was caused by supply-side factors. The supply-side factors have been addressed by the government, particularly with reference to pulses, edible oil and also petrol and diesel. So, all these augur well for inflation.

So, food inflation by and large looks to be now under control. But again, food inflation always has uncertainty built around unseasonal rains and unexpected weather events. That is a risk factor, but food inflation looks stable now.

In India, core inflation remained elevated. That is a policy challenge. We are keeping a close watch on it. Fuel inflation also remained elevated. So, we are very watchful with regard to core and fuel inflation.

Talking about the global scenario, yes, the language is changing. It is getting more nuanced. So we have to wait and watch the evolving situation. Energy prices have suddenly gone up. Similarly, steel prices, commodity prices, crude oil prices — they have gone up. There is a sense among some people that they seem to have peaked. But these markets are difficult to predict.

Globally, therefore, inflation has to be very carefully watched for countries like India. So far as our domestic inflation scenario is concerned, the projection we gave in the last monetary policy committee meeting of 2020-21 was 5.3 per cent, and our expectation at this point in time is in line with that projection. And the reduction in petrol and diesel prices, which incidentally we did not factor into our 5.3 per cent projection — that is definitely a positive development.

In a fast-changing scenario, one has to remain very careful, and one has to be very watchful of global developments as well as the domestic situation.

You say you will stick to your inflation projection. You have been continuously saying that you will continue with the accommodative monetary policy stance till you secure growth. But for the last few months, all the macro numbers, high frequency data and commentators are saying India is back on the growth path. Do you also see it the same way?

Growth impulses have become stronger. The fast-moving indicators are looking very, very positive. Again, in the context of inflation, our assessment is that we are on the path of reaching the 9.5 per cent GDP growth projection which we had given for the current year. That seems to be achievable at this point of time. But there are headwinds emanating from the external sector. There are global headwinds coming up with regard to, for example, growth in the advanced economies, which was very positive up to the second quarter of the calendar year. That seems to have moderated in the third quarter.

The global growth projection of 5.9 per cent made by the IMF may or may not be achieved. There is a possibility it may undershoot the 5.9 per cent target, mainly because of factors like shortage of semiconductors, shortage of shipping facilities, charges around freight costs, and higher input prices, while Covid still remains quite high in many Asian countries and European countries.

So, therefore, global headwinds are very much there, as far as India is concerned. But India’s growth impulses are strong and 9.5 per cent in the current financial year would be achieved as it looks today.

Are you not afraid of what happened during Subbarao’s time? The baby steps turned out to be a case of too little, too late.
 

It is easier to say things in hindsight. So, I am not commenting on what happened earlier. But I think our actions are very much in sync with the evolving situation. I have said earlier that we are rebalancing the liquidity which is available in the system. 

While we were announcing all these measures during Covid times, we were always constantly assessing the downside risks, and to the best of our ability we have always built-in provisions to see that they are given out for a finite period and they automatically get rebalanced to the original situation.

For example, the liquidity which we injected into the system, the LTRO, the TLTRO, or for that matter the CRR reduction — most of it has a sunset date. CRR was given for one year, and has ended. So, that much liquidity has come back from the system to the RBI. We gave LTRO initially for three years, then TLTRO for one year. So, out of the total liquidity that was injected during the pandemic, a large part of it has already come back to the RBI. 

What added to the liquidity situation is the inflow of foreign exchange. Now, obviously, to prevent excessive volatility in the forex market, the RBI has to intervene in the forex market from time to time. As a result, that has added a lot of liquidity into the system. I have already announced in our monetary policy statements earlier that through the variable rate reverse repo auctions of 7 days, 14 days, and 28 days, we have notified about Rs 7.5 trillion, and against that a little less than Rs 7 trillion is coming to us through the reverse repo window.

So the liquidity is getting rebalanced. And the liquidity that we have ensured in the system is basically a reflection of the monetary policy stance of accommodation. As long as the monetary policy is accommodative, we will have to see whether the liquidity is in surplus. But we are trying to rebalance it, in sync with the evolving situation.

You are soaking up liquidity in different ways. Late last year short-term rates went up. Commercial paper, certificates of deposit, T-bills — all have gone up. Also, you stopped G-SAP. So, is this the new reality now? 

The overnight money market instruments, including the tripartite repo or the overnight repo, are hovering around the reverse repo rate of 3.35 per cent. The weighted average reverse repo rate is a little higher. So far as the 7-day, 14-day or 28-day reverse repo are concerned, we are letting the market function.

Let the market determine what the yield is. So we are not doing the kind of active interest rate determination we sought to do last time through G-SAP and explicit statements. Now we are letting the market function. Therefore, you would have seen that this has brought in a lot of orderliness in the market. In the government securities segment also, we are letting the market function. That does not mean we will just accept that suddenly interest rates go up very steeply.

But by and large, the market evolution of the interest rate even in the g-sec market seems to be quite orderly. It did go up to about 6.39, but again came back to 6.31. So, I think the market has accepted the reality. Perhaps there is greater synergy in thinking between the RBI’s expectation and the market behaviour, and the market is, I think, functioning in an orderly fashion.

You are saying you’re happy with market-determined rates. Unless called for, you will not intervene.

Yes, particularly for reverse repo liquidity management, we are letting the market decide.

RBI is letting the market decide short-term rates. You raised the problem of plenty in the forex market. This is something we have seen post-Lehman. Do you think it’s really a problem of plenty? How do you tackle it?

Not really. Most of our forex reserves are built up not through the current account surplus. We are a current account deficit (CAD) country, and our reserve accretion is happening because of capital inflows. Whenever there is a capital inflow, there is a corresponding liability outside, so the level of forex reserves we have is adequate. It puts us in a comfortable position, and gives us greater confidence to deal with any volatility, should it happen because of taper or because of unwinding of policy by advanced economies.

We are much more comfortably placed today to deal with any volatility in the foreign exchange market, and it is our endeavour that RBI will be in a position to ensure stability in the foreign exchange market. We will not see the kind of challenges India faced during the taper tantrums of 2013. But at the same time, our forex reserves have a corresponding liability and that is something which we must keep at the back of our mind. Being a CAD country at one level is good because you get capital from outside, and there is a net accretion of capital from outside. So it helps us to finance our current account deficit.