‘The stance is exactly where it should be’

AftertheRBI’sdecisiontoreducethereporateby25bps,Governor URJIT PATEL,Deputy Governor VIRAL ACHARYA & SENIOR COLLEAGUES spoke to the media on the Monetary Policy Committee’s decision to maintain a neutral stance, the need for better transmission and other

There is a liquidity overhang in the banking system for quite some time. Then, 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 outturns and our projections, going forward, we felt that cutting the rate by 25 basis points (bps) while keeping our stance neutral was something we should be doing at this juncture. By October, the MPC would have got two more inflation trends, GDP data and a clearer picture on surplus liquidity in the banking system. Also, you are taking measures to improve MCLR transmission. So, why not a rate cut in October? Patel: The data flow these days is continuous and we did have the GDP numbers 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. With several factors contributing to uncertainty around the baseline inflation trajectory, there is need for a bigger buffer in terms of real interest rates. What is the kind of buffer you are looking at? ViralAcharya: 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, we are just slightly outside of the range of 1.75 per cent and we are comfortable with that. SBI has cut the savings bank rate recently, indicating pressure on margins. Do you really expect banks to transmit this rate cut 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. Second, 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 didn’t you change your stance? Also, if RBI stays on the path of four per cent (inflation rate), should one assume this is the extent of accommodation you think is possible and further rate cuts would only be possible if we start to see further deceleration in inflation or quicker disinflation? Patel: 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. For full reports, visit www. business-standard.com

“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” URJIT PATEL, RBI Governor