Though the Monetary Policy Committee (MPC) has kept key policy rates unchanged for the second time in a row, RBI governor Shaktikanta Das is of the view that there is space available to cut interest rates depending upon evolving situations. During an interaction with reporters after releasing the policy statement, Das said MPC would act in time, perhaps ahead of time. He also said the idea behind long-term repo to the tune of Rs1 lakh crore and tweaking maintenance of cash reserve ratio norms was to ensure better monetary policy transmission. Edited excerpts.
What's the idea behind RBI's long-term repo of Rs1 lakh crore and tweaking of maintenance of cash reserve ratio (CRR) norms? Is it a kind of interest rate cut?
These efforts are to ensure better monetary policy transmission. So, we want to inject Rs1 lakh crore in the system that will enable the banks to reduce lending rates. You said there is a space available for policy action and your forecast shows inflation has peaked out.
Is it enough for a rate cut action in next policy? Or are you looking at a CPI level of 5.5% or 5% to take action?
We're expecting headline inflation to fall. So, once the downward slopes start, we have to see how quickly it plays out. On that basis, the monetary policy action will be taken by MPC at that time. So many other factors also play their role. The policy space is available for a rate cut, but it will depend on the evolving situation. MPC has been proactive in 2019 and will continue to do so in 2020.
The policy statement mentions that the outlook on inflation remains uncertain. How should one read into that? Will there be policy action if inflation remains in the projected range of RBI?
Inflation was full of surprises last year, especially food inflation. I said MPC will closely monitor the situation and act in a proactive manner. There is space for action, and MPC will act in time, perhaps act ahead of time, as it was done in 2019.
As you have announced long-term repos in policy (1-year and 3-year), is it only Rs1 lakh crore or will it be done systematically? Does this mean it will replace OMOs?
The long-term repo operations are not intended to replace OMOs. The idea is to help banks somehow to reduce cost of funds for the long term… so, it is at repo rate. This step also intends to give assurance on liquidity to banks, which should encourage them, especially when they see deposit rates are ranging downwards.
On the one hand, you are saying rates cannot be cut right now. On the other hand, it is mentioned in the policy that liquidity is surplus and continues that way. From December, you have introduced Operation Twist. It is not clear what is the framework of the monetary policy.
What were you trying to achieve from Operation Twist? Was it just cutting interest rates?
The monetary policy framework as defined in the RBI Act is keeping price stability. Liquidity management is the operating procedure from monetary policy, therefore it is implemented that way.
If you wanted to bring down rates, you could have chosen to cut repo rates. Why choose other options? Were you trying to manage yields on government securities?
There are several options available. You are suggesting one, I decided to choose the other. We are keeping surplus liquidity for the monetary policy transmission. From June, system became surplus in liquidity. Operation Twist is an instrument used for better transmission as you know corporate bonds are benchmarked to lending rates in G-Sec. So, by Operation Twist, you are able to soften yields of government securities of longer range. For example, the 10-year bond acts as a benchmark for corporate loan rates. So, the effort was mainly greater policy transmission to the corporate bond market, not so much to manage the yield on G-Sec.
We need clarification on the three-year repo announced. What happens if a bank borrows at 5.15% and down the line you increase interest rates? Banks will be obliged to pass on the rates at that time. So, they have blocked in three-year money. So, how does that transmission work?
It is a call the bank has to take as to what they see as three-year interest rate scenario. Currently, overnight borrowing by banks comes back to RBI in form of reverse repo. Therefore, we want them to borrow for a longer term so that it moves in the form of lending.
The Budget has several steps to incentivise the forex sector. Do you believe this is the right time to provide incentives for further flows? Also, you tried to incentivise, credit flows to certain sectors. Is RBI thinking about relaxing capital adequacy or risk weights to these sectors?
The underlying theme of all our decisions is financial stability. So, before touching capital adequacy and risk weight, we have to be very, very careful. Forex flows are carefully monitored by RBI. We will be able to deal with inflows. There are various instruments available if a situation warrants.
Under the FRBM Act, if the trigger clause is exercised, the government can also monetise the deficit. Is there a concern for it?
At the moment there is no such plan. The borrowing numbers are also there before you. In the current financial year despite fiscal deficit going up, the open market borrowing number remains the same.
Will increase in the deposit insurance cover make cost of funds higher for banks?
Deposit insurance limit was announced in the Budget… which has been increased from Rs1 lakh to Rs5 lakh. The premium is something which we are considering… it will be increased from 10 paise to 12 paise per Rs100 for the time being. So, the impact on bank's balance sheet is not likely to be much.
Will RBI be supporting the government borrowing programme through Operation Twist?
The objective of Operation Twist is to facilitate the monetary transmission in the corporate bond segment. It is not intended to support the government borrowing programme but as the debt manager of the government, RBI will ensure that the government borrowing programme goes well.