Spreading disinflation over 2-3 years to reduce output loss, says RBI

'There is no blanket ban on opening of current accounts', said M Rajeshwar Rao

After the Monetary Policy Committee’s (MPC’s) decision to hold the benchmark rate at 4 per cent and continue with its accommodative stance, RBI Governor Shaktikanta Das, deputy governors Michael Debabrata Patra, M K Jain, T Rabi Sankar, and M Rajeshwar Rao took questions from the media and addressed the raging topics in the financial sector. Edited excerpts:

How does one read the conflicting messages on inflation? 

Das: We are dealing with extraordinary situations and there are several currents and cross-currents. There are many conflicting objectives that the RBI has to manage. The policy action has to be nuanced, it cannot be uni-directional, or just black and white. This is precisely what we have tried to do. 

Is it fair to call the inflation spike transitory? And can you give any timetable on new bank licences? 

Das: On the licences, we have formed an external advisory committee and they are going through the applications. For transparency, we have put out the list of the applicants.

Patra: On the inflation front, if we all can step back a little bit and look at it from a historical perspective, things will get clear. Between 2016 and 2020, we kept inflation at 4 per cent. In 2021, there was a pandemic, an extraordinary situation, wherein margins were raised, taxes were hiked, there were supply-side disruptions, so inflation went up to 6.2 per cent on average. Now, we are looking at average inflation of 5.7 per cent, which, from a historical perspective, is a remarkable improvement over 2021. So, the path of inflation is being calibrated downwards to reach 4 per cent. We are spreading disinflation over a period of 2-3 years so that the loss of output is minimised. 

Transmission in existing loans has been less. Is the RBI focusing on this? 

Das: We are focusing on it. The external benchmarking introduced in 2019 has worked out quite well. From February 2019 to July 2020, the transmission on fresh loans has been 217 basis points (bps). For outstanding loans, it has been 117 bps. For outstanding loans, there is a cycle of loan reset. In the initial pandemic period — March-July 2021 — the transmission in fresh loans was 146 bps, whereas for outstanding loans it was 101 bps.  

Can you clarify the current account norms for smaller borrowers? 

Rao: There is no blanket ban on opening of current accounts. We have been quite flexible. And now taking into consideration some of the concerns put out by banks, we have extended the timeline and we will be addressing the issues in consultation with the Indian Banks’ Association and banks.

What message is the RBI trying to send out with the recent bans on multiple card networks? 

Das: As a regulator, it is our job to ensure compliance. So from time to time, we impose restrictions as required in individual cases. 

Are you concerned about retail slippages? 

Jain: We are closely monitoring this. A little bit of stress is visible but it is not alarming and we are engaging with the regulated entities constantly, particularly, the outlier banks and NBFCs. In the past, we advised the entities to improve their provisions, which they have responded to. If we look at the results of all the banks (March 2021) and compare them with the pre-Covid period, there is an improvement in all the parameters — capital adequacy, gross and net NPAs, slippages, provision coverage ratio, and profitability. So, the sector is better positioned today than it was before the onset of Covid. 

What is your view on the government’s move to bury retrospective tax? 

Das: I believe this is a very good step and a timely one too. And, it’s definitely a welcome measure. 

Do you think the RBI has done enough and now it’s time for the government to come out with fiscal measures? 

Das: The RBI is in a “whatever it takes” mode to support growth. As far as fiscal support is concerned, it has been very prudent, calibrated, and responsive. Initially, the focus was on the marginalised sections of society, which then shifted to sectors that were under stress due to the pandemic.