 "Monetary policy review: We use one stone to kill one bird, says RBI")
Reserve Bank of India (RBI) Governor Shaktikanta Das and Deputy Governor Michael Debabrata Patra spoke on a range of issues at a post-monetary policy committee (MPC) media interaction. Edited excerpts:
Will there be a calendar for open market operation (OMO) and is this in preparation for the JPM index inclusion?
Das: It has nothing to do with the bond index inclusion and, let me reiterate that it is a part of our domestic liquidity management. In regard to a calendar, I have said that we will watch the evolving trends. There are several moving parts in the whole liquidity scenario. We will watch the evolving trends and notify as and when necessary.
Does the RBI expect banks to further adjust rates so that transmission is complete? Are you worried that a change to a ‘neutral’ stance will signal a dilution of your resolve to act on inflation?
Das: A change in stance to ‘neutral’ will be on table when the situation arises. At the moment, rate hike is still incomplete. We have increased the repo rate by 250 basis points, but it has not fully translated to either the deposit rates, or the lending rates. There is some distance still to be covered. We would expect that to align with the increase in the repo rate and therefore at the moment, the stance remains ‘withdrawal of accommodation’.
Why OMO-sales when liquidity is already in deficit?
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Das: You see, liquidity is not in deficit. The liquidity over the last 2 or 3 weeks went into a deficit mode, mainly because of advanced tax payments and goods and services tax (GST) payments. Overall if you see there is surplus liquidity. We have announced the withdrawal of Rs 2,000 notes and have got back about 3.43 trillion so far. Only about Rs 12,000 crores or so are left.
There is a substantial amount of liquidity, which has accumulated because of the withdrawal of Rs 2,000 notes. Government spending is also picking up, which will add to the liquidity in the system. In the festive season, demand for currency will go up and so will the currency in circulation. That will drain out some amount of liquidity but overall, if you look at it, the liquidity is in surplus. We have to be active…there will be active liquidity management and we will remain watchful. The whole liquidity matrix has several moving parts. We will undertake whatever operations required from time to time. OMO sales is one which we thought would be required, therefore we have mentioned it in my statement.
How will the OMO sales take place? Will it be an auction or behind-the-scenes operation? Does it have anything to do with the rise in global yields?
Das: It will be done through an auction and not through the Negotiated Dealing System-Order Matching (NDS-OM) platform. We will notify it before undertaking the auction. It has nothing to do with the global bond yields. If you see the statement carefully, what we have said is that our liquidity management will be consistent with our monetary policy stance.
As global yields go up, as a central banker, what are your fears and what are your tools?
Das: Our domestic bond yields are not reacting to international factors like the bond yields are going up in some advanced economies. Our bond yields are determined primarily by domestic factors. The bonds going up elsewhere, especially in the United States, normally lead to currency depreciation in emerging market economies, but the difference in the context of India is that our forex reserves are sizable. That gives a lot of confidence to the market. Secondly, we do intervene to maintain stability of the currency and to prevent excessive volatility. To put it differently, we use one stone to kill one bird.
Do you think there is a need for the RBI to rework the liquidity framework?
Patra: Under the existing framework, the 14-day VRRR and VRR is the primary option, but active participation is not seen there. Under the current framework, the call rate needs to align with the repo rate, but it is more towards Marginal Standing Facility rate.
The liquidity management framework is robust. The I-CRR was not a reaction to low subscriptions in the regular auctions. It was an instrument intended to deal with a special specific occurrence -- that is the withdrawal of Rs 2,000 rupee notes. The regular operations are essentially intended to enable banks to maintain their reserve requirement cycles.