After the Reserve bank of India’s (RBI’s) decision to reduce the repo rate by 25 basis points, Governor Urjit Patel and senior colleagues spoke to the media on the Monetary Policy Committee’s (MPC’s) decision to maintain a neutral stance, the need for better transmission and other key issues. Edited excerpts:
There has been a liquidity overhang in the banking system for quite some time. In addition, inflation rates could also rise in the coming months. Do you think there was a need to cut rates now?
Urjit Patel: We have been facing the challenge of liquidity overhang for quite some time and we are managing that. We are keeping the weighted average call rate within the policy corridor and reducing the width of that corridor was part of our toolkit. While our statement acknowledges that inflation is likely to rise from the current lows, it is going to be around four per cent by Q4.
Given the factors that we have pointed out, inflation, excluding food and fuel, has fallen considerably over the past three months. Even if we include the impact of the house rent allowance (HRA) being paid by the central government (based on recommendations of the Seventh Pay Commission) – a source of uncertainty – still, we are close to four per cent.
I think while we have taken a calibrated policy decision, based on the out turns and our projections, going forward, we felt that cutting the rate by 25 basis points while keeping our stance neutral was something we should be doing at this juncture.
Was a rate cut in October discussed by the Monetary Policy Committee (MPC) because by then, you would have got two more inflation trends, GDP data and a clearer picture on surplus liquidity in the banking system? Also, now you have taken measures to improve MCLR transmission. So, why not a rate cut in October and why in August?
Patel: The data flow these days is continuous and we did have the GDP numbers that was released a couple of months back. We also had two more data points regarding the inflation print itself. And, encompassing the development since June, the normal monsoon, the smooth roll out of the GST, the inflation excluding food and fuel coming down, we thought this was an opportune time to do a 25 bps cut.
You mentioned about several factors contributing to uncertainty around the baseline inflation trajectory. That obviously called for a bigger buffer, in terms of real interest rates. What is the kind of buffer that you are looking at? Would you be comfortable with positive real rates?
Viral Acharya: We are looking at the real rates as one of the drivers into the decision-making; yet, it’s not the sole component. It’s best to look at the real rates more when you think things are steady more than when things have gone through a fair bit of uncertainty as we have seen over the last year. Nevertheless, I think if you take the six per cent repo rate and take our projected inflation rate of slightly over four per cent. My own view, as I had stressed in the minutes last time was that in a time when the transmission is not necessarily guaranteed to work as well, given the structural issues of debt overhang that have been flagging. I think we are just slightly outside of the range of 1.75 per cent and we are comfortable with that.
We have seen SBI has cut the savings bank rate. So, clearly, they are indicating that the margins are under pressure. So, with this rate cut do you really expect banks to transmit the following by cutting lending rates further?
Patel: The way to look at the transmission is to determine what has been the case since we started the easing cycle and there are two or three things that are clear. One, on new lending the transmission has been much stronger, especially in those segments where there is a lot of competition like housing loans, personal loans, where the NBFCs also play a big part. Secondly, on the part of the loan portfolio that is tied up on account of base rate and liabilities of a longer nature, the transmission has been slower. Given the prevailing liquidity conditions and that we have reduced policy rates by a substantial amount since the easing cycle started, I think there is scope for banks to reduce lending for those segments that so far they have not benefitted to the full extent of our policy rate cuts.
Why did you not change your stance while cutting rates and also, if you stay on this path towards four per cent, should one assume that this is the extent of accommodation you think was possible? Only if we start to see a further deceleration in inflation or quicker disinflation, could we see further room open up for rate cuts?
The main reason why we have been cautious enough to stick around to the neutral stance is because the trajectory of inflation is expected to rise from the current lows. And therefore, there is nothing to explain in terms of why we have not changed the stance. The stance is exactly where it should be and what it was in June. And therefore it was a right call to make by a majority of four to two.
You have mentioned that the government needs steps to look at private investment, remove infrastructure bottleneck. If we even look at the recent data that has come out, IIP and factory output have weakened. How much did that influence the decision to go for a rate cut?
Patel: We have mentioned that we could have a stronger growth performance if some of these things are taken forward, in particular, removing infrastructure bottlenecks, finding measures to reinvigorate private investments and provide a thrust to the affordable housing initiative of the government which has a potential for very strong multiplier effects. I think a fair number of pieces of the jigsaw in that context are already in place. There is one that we are aware of and which, according to several stakeholders, is coming in the way of speedier implementation is the clearance of these projects on affordable housing at the state government levels. I think we need a time-bound single-window clearance, if this initiative, which has a potential for strong growth impulses, going forward, to come into place.