MSP increase to impact CPI inflation by 10-12 basis points, says RBI

'Banks have been cautious. I think there is still some amount of liquidity sitting there', said Das

Reserve Bank of India (RBI) Governor Shaktikanta Das and Deputy Governors Michael Debabrata Patra and M Rajeshwar Rao discussed a range of issues at a post-monetary policy committee (MPC) press briefing. Edited excerpts:

Last time you stressed that it was a pause not a pivot. Should we interpret it as pivot this time?

Das: I would mention only if there is a change. It was a pause in this meeting of the MPC, and I have not said anything about pivot. Whatever I said in the last meeting that it is not a pivot, I reiterate that.

You said future actions would be based on evolving situations. According to your assessment only, the situation has improved from last time. How should we interpret that without mentioning the exact word of pivot? Do you believe that we are much closer to the change in stance than we were last time?

Das: I have said it in my statement and that is the MPC’s view also that our target is 4 per cent inflation. Our effort will also align all our actions to move towards that target and reach that target. It will therefore depend on the evolving situation. We will be very watchful of the evolving situation and modulate our action suitably.

To say anything more than that at this stage is not desirable. About a year ago, we had said that given the high uncertainty which is prevailing all over, particularly in the external sector, and especially when we are in a tightening cycle, it is not desirable to give any forward guidance as that may create expectations which may not be aligned to our thinking or our action. 

Your target for variable rate reverse repo (VRRR) auctions was Rs 4.5 trillion. What is the reason why banks appear to be cautious in this regard?

Das: Banks have been cautious. I think there is still some amount of liquidity sitting there. When we say banks are cautious, let us remember that through the VRRR auctions, till yesterday (Wednesday) around Rs 1.5 trillion have been mopped up.

Patra: The reason for caution among banks is that there is an imminent advance tax outflow that will happen in the next week. They are holding back money for that purpose. We are persevering in our efforts. The fact that we have repeated our auctions indicated our purpose, which is what we wanted to convey.

It was an important effort to withdraw that excess liquidity so that deposit rate-lending-rate was in alignment with what interest rate hike is. That is why we have withdrawn Rs 1.5 trillion so far.

What will be the impact of minimum support price (MSP) hike on inflation and has it been factored in your revised projection?

Patra: We got the MSP details yesterday (on Wednesday). We find that the average increase across crops is around 7.5-8 per cent. Over and above our projections, this will impact to the extent of 10-12 basis points.

There are expectations that the Fed could continue to keep hiking rates. Is the RBI comfortable with a rising interest rate differential with the Fed?

Das: Our monetary policy actions are determined primarily by the domestic conditions. We do not look at the actions of other Central Banks to determine our actions. Yes, we do watch what other central banks are doing because that will have an impact on the global financial situation — the financial sector situation, on currency markets and other aspects.

When would the expected credit loss framework be implemented for banks?
 

Rao: We received comments from all the stakeholders. The comments are still being evaluated.

Das: We will give them sufficient time for implanting ECL norms. We are mindful of the fact that the banks will need some time to implement it. (On additional capital requirement) We have assessed it. It is quite manageable as per our assessment.