RBI has done great work under your leadership. We have emerged on the pedestal post the Covid crisis, but the elephant in the room is inflation. Has RBI won the war against inflation?
So far as inflation is concerned, I think it is getting increasingly anchored. We reached a peak at 7.8% and thereafter the inflation has moderated in the subsequent three prints. The latest was 6.7% and the inflation expectations are also getting anchored. We do a survey of professional forecasters, we do a survey of investors, we do a consumer survey and a household survey now. All the survey results are pointing to the fact that expectations around inflation are getting anchored.
The bond yields, especially at the long end, are also reflecting the fact that inflation is getting anchored. For example, if you look at the 10-year GSec, before the May meeting of the MPC, just before we started the current rate hike cycle with a 40 bps hike, it was around 7.1-7.12% and today it is about 7.28%. This morning, it was 7.3%/ Therefore, the way the bond yields, especially at the long end, behave is also reflective of whether inflation expectations are getting anchored.
There are other important factors also which are playing a role. For example, the softening of the crude prices, softening of certain commodity prices and the appreciation or the depreciation of the US dollar. The DXY, after reaching about 105-106, had moderated to about 104. Now it is again it seems to be going back.
So there are so many factors which are at play but coming back to your question, as I have said in the monetary policy statement, at this point, according to our assessment, inflation has peaked and it is expected to moderate going forward. Inflation expectations are also getting well anchored but there is absolutely no room for any complacency. Consumer inflation is still at 6.7% and we need to bring it down, first below 6% and then move closer to the target rate of 4%.
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As there are so many uncertainties – the geopolitical developments, the spillovers, how the dollar appreciation is going to happen, how the advanced economies which are facing bigger problems of inflation turn out. Inflation is at 10% in the UK. In the US, it has moderated to about 8.5% or 8.7%. Advanced economies like the Eurozone are also facing the problem of high inflation. We are going to watch how they are going to adjust the rate and what spillover it will have on the financial markets.
There are several uncertainties but just to repeat myself, inflation is moderating, expectations are getting anchored and our macroeconomic fundamentals and the financial sector stability remain quite resilient. That was a pretty long answer but I thought let me put things all in perspective.
Since you are a cricket fan, I am tempted to frame my next question around that. Can I say that the Reserve Bank of India in cricket terminology is no longer fighting with inflation on the front foot, you have come on the back foot?
No, no we always like to choose the short ball. In cricket, sometimes you have to play front foot, sometimes you have to play back foot but by and large in the last two and a half-three years ever since the pandemic began, we have been playing on the front foot and at the current moment we will play in the front foot but when it is necessary, we will step back and leave out one or two balls and may be go for a slight late cut.
So if I have to get your definition of interest rates, now you have tightened and that was in T20 style. Going forward, will interest rate hike be a function of test match play? Is the T20 rate hiking cycle behind us?
My compliments to you for putting it very nicely but I will not be able to give forward guidance about our future rate actions. You said that we played a T20 game, now if you actually look at it, our approach has been fairly steady. It is not as if in May we increased the rates by 40 bps and then 50 bps in three instalments. Look back at what we did before May. In April, we introduced the SDF for liquidity absorption. That was 40 bps higher than the reverse repo rate and that led to an increased, synergised, synchronous increase in the liquidity absorption rate. The overnight call rates went up by about 40 bps or so.
Before that, we have been slowly and steadily pulling out the liquidity through the VRRR (variable rate reverse repo) auctions. We have been pulling out quite a bit of liquidity even before that. In the 70s, when Sunil Gavaskar was at his peak, you would think that he was playing a very slow game but suddenly you find that he has scored a century. So sometimes actions are taken silently and they are not visible.
Over a time horizon, RBI has been acting steadily but when because of this sudden development of the war in Ukraine, the crude prices touched $130 and then came down to about $120 and remained thereabouts and commodity price markets were hit. The edible oil supplies were hit. Fertiliser prices went up and there was a sudden spike in inflation. That sudden spike in inflation required that we increase the pace of scoring the rounds but we have been playing quite steadily and going forward. The incoming data and the way the situation unfolds, as I describe the inflation growth dynamics, how the dynamics of inflation and growth plays out will determine our future action. Beyond that, it is very difficult and not desirable to give a forward guidance that we will stop or increase more or increase less because it creates unnecessary expectations and you may not do what you were saying today because the situation is very uncertain.
During policy making, what weightage would you assign to local cues, local factors and how much weightage would you assign to global factors?
Our monetary policy is primarily determined by domestic factors. Global factors are important in so far as the impact on the domestic situation. I mentioned the war in Ukraine, I mentioned commodity prices going up, the crude oil prices going up because they impact our domestic inflation. We are primarily governed and influenced by our domestic situation. But indeed it is a globalised world where we are impacted by what is happening all around us and naturally we evaluate how each development is going to impact us and then prepare ourselves.
RBI now is much more nimble. When you had to open the flood gate of liquidity post Covid crisis, the Reserve Bank of India went all out. Everybody feels that you are behind the curve but our channel view is that RBI is not behind the curve in terms of interest rate hike. Is there a departure in terms of RBI being much more nimble, much more dynamic?
Whether there is a departure, it is for people like you to judge but as an institution, there is a great amount of consistency in the overall approach of the Reserve Bank in the sense that the focus of Reserve Bank has always been maintaining financial stability. Let us go back to the early 1990s when the economic reforms started or around the year of the Asian currency crisis. Thereafter, all actions of RBI have been consistent in the sense that the focus has always been on financial stability.
But specifically to address your point, we are nimble because the situation warranted that. The Covid pandemic, the virus came all of a sudden, nobody was prepared for this kind of a shock to the global economy and suddenly countries around the world went for a lockdown and one had to act quickly and effectively. Now things are coming under control on the Covid front, thanks to our massive vaccination drive and the other measures taken and also because the financial sector held on very well.
I must also mention that the financial sector held itself up very well because of several actions which the Reserve Bank has taken. Then there was the Ukraine war and that was also a sudden development and before 24th February nobody had expected a war of this magnitude to happen and to last so long, Naturally it has produced impact.
Over the last three years, the situation demanded that we had to act in a very nimble manner. I remember the initial days of Covid around March 20 or so. The incoming news was very disturbing and even before the lockdown was announced in India, the Reserve Bank within a matter of four-five days had put up the quarantine facility and all our market operations were undertaken from the quarantine facility on the outskirts of Mumbai.
We were trying to be as proactive as possible and the first lockdown was announced on March 25, 2020. On behalf of the RBI, I made those announcements on March 27. Similarly, when the war started, we were watchful and in April we took a number of actions, other than a rate hike which I think some analysts were expecting.
Effectively we took several actions on April 6, including the introduction of the SDF and we announced several other measures. We changed the sequence of our priorities from growth and inflation to inflation and growth and therefore we have tried to be nimble as possible because we are living in a very dynamic world and the central bank has to become a dynamic organisation in terms of actions – not action for the sake of action but action because it is necessary.
We have to be in tune with the times and also anticipate emerging developments and always remain in sync with the times. Today, debate around whether RBI is behind the curve has hopefully ended.
In your MPC briefings and at various public forums, you often referred to the the interest rate trajectory which the US Fed followed. But the elephant in the room according to us is China. How closely are you monitoring China? It is a big economy. It is going in a different direction and that will have an impact on how things would move now going forward.
I refer to the US because there are several federal governors. One statement comes out from one governor saying that there should be bigger rate hikes. After two, three days there is another observation. All that influences the market.
On Friday, the US Fed chief is going to give a speech at Jackson Hole and look at the the kind of expectations that are building up. There is one school which is expecting that perhaps he will give a hawkish message, the other school believes that he will not be as hawkish…
What is your personal thought?
Frankly I do not know and I would not like to prejudge him because they are also facing as uncertain a situation as we are facing but coming to our bigger neighbour, that is China, yes we are watchful of all the data. It is the second largest economy and we are watchful of the data coming from China and how it will impact our domestic economy in terms of domestic manufacturing. If the Chinese growth slows down, what impact will it produce on global growth. All these things we do monitor very closely.
We monitor the global developments and as a part of the global developments, we do monitor the happenings in all large economies like the US, the euro zone, China, Japan. We also monitor what is happening in Africa. Now in all this global debate, we do not hear of any mention of Africa. It is a huge continent and we also have to see what is happening there. So we monitor on the global scale all the large economies but at the same time we do not leave out any area which may not look very important but tomorrow if there is a food crisis in parts of Africa, naturally it will impact the global cereal prices. Like when the supply of wheat from Black Sea region stopped, suddenly there was a decline in the supplies. Naturally, cereal prices went up in Africa and all over the world and therefore as a part of our global monitoring, we do monitor China, Japan, euro zone, US all these countries.
I would like to draw your attention to something which is very relevant and that is the trade deficit and the CAD. Trade deficit is at a record high, CAD at an alarming high level. There is a slowdown in the world. We can debate whether it is soft landing or hard landing, but the slowdown will impact exports and global FDI and FPI flows into India. How are you planning to address that?
According to our assessment, the CAD will be within manageable levels. There has been a little bit of movement on crude oil prices, they have slightly hardened. There are many experts internationally who are taking a position that the crude oil price will be below $100 per barrel. This was not in the realm of anybody’s thinking a couple of months ago. There are institutions which are projecting $95 per barrel.
In the Reserve Bank and MPC, we have assumed $105 as the average price for the current year and therefore according to our assessment, current account deficit (CAD) will be within manageable levels and we will be able to finance it in a reasonably comfortable manner and here’s why. The Indian exports have picked up and they are expected to do well in the coming months also. The exports in July came down but that was mainly confined to one particular sector; petroleum and petroleum products. Now the export tax has also been reduced to some extent and the expectation is that petroleum product exports will pick up and will do better in August. But we have to wait till the end of the month to see the results.
In the last two, three years, India has entered new markets in terms of exports. India has also entered with products. India’s share in the total global trade or rather the volume of our exports in certain items have gone up over the last two, three years and the PLI scheme has also helped. If there is a large economy which is slowing down and indeed the European continent is moving towards recession, we have to see, but for a slowdown in growth, there will be a contraction in export demand. But when there is a contraction in export demand and at the same time, the global supply chain is also disrupted, it opens up new opportunities for Indian players to get into the global value chain.
Many of our exporters and manufacturers and service sector players are getting into that global value chain in a bigger way than what they were three, four or five years ago.
Coming to financing the current account deficit, it was only outflow till the end of June. We are now seeing positive net inflows in July and August 1 till now there have been consistent inflows and that is expected to sustain. Globally also, international investors are looking at India with greater optimism.
I said this somewhere earlier also. The country has witnessed two major shocks. There have been two Black Swan events for the entire world; Covid-19 pandemic and the war in Europe. Despite these two huge shocks, our macroeconomic fundamentals remain resilient, our financial stability is also maintained and according to our projections, we are expecting 7.2% growth while inflation is moderating.
Capital inflows are there and there is financial stability, macroeconomic stability and the country has withstood it. Not many countries around the world have done it. Therefore I think there is greater investor interest in India. Compared to last year, FDI has done slightly better. I gave the figure in the last MPC, it is about $13.6 billion this year from April 1, compared to $11. 6 billion in the previous year. Therefore, all in all, the current account deficit should be within manageable levels. That is our assessment and we will be in a reasonably comfortable position to finance our current account deficit.
If I put two and two together which is your assumption that crude will stay above $100 – crude is now below $100, inflation has peaked out, MPC has already spoken about inflation coming down to 5% in the first quarter of the coming financial year, eventually the glide path for inflation somewhere in FY24 would be 4%, will that be a stretched assessment?
Yes, we have also said this earlier, I have said it and I think my colleagues in RBI have also said it and we said this about four, five months ago that we would like to bring down inflation over a time cycle of about two years or so. Therefore if you say FY24, I think by and large what you say, may play out accordingly and if you look at the projections which we have given in the last MPC, it is 5% in the first quarter of next year, 5.8% in the last quarter of this year, 5% in the first quarter of this year and thereafter it tends to moderate, but in between, there will be the base effect. Now base effect sometimes works favourably and sometimes it may be unfavourable; but by and large, I think we are moving closer to 4% in a steady manner without much growth sacrifice.
The RBI has always maintained that we are not worried about the real level of rupee, we want to trim the volatility out, can you define volatility for us because each time press has asked you a question on rupee you have said look, we are here to make the rupee stable not volatile, what is your definition of volatility, nobody has asked you this question before so I am tempted to ask you this?
I will come to that but before that let me also slightly supplement my previous answer. I mentioned about current account deficit, I mentioned about inflation coming under control over a two year cycle but then there is no room for complacency. I have said this earlier, we are very watchful, we monitor each and every small incoming data and given the kind of uncertainties which prevail, we have to remain watchful and there cannot be a let up in that.
It is not as if the war in Europe is over; Covid has not ended, even the United States is reporting more than a lakh cases per day. So, we have to remain watchful. Now coming to our definition of volatility, many things are not possible to define in the classical terms but as a concept, volatility means wild movements and we try to check volatility in both directions – when the rupee is appreciating and when the rupee is depreciating.
In the last two years, there was a considerable amount of forex inflows into India. We started accumulating reserves at that time because we knew that the cycle will turn and there will be a time when there will be outflow of dollars. We have learnt from past experience. So when the inflows were strong we started picking up the dollars to build up our buffers and that was the first objective.
The second objective is that we know that the wheel will turn and therefore, if you let the rupee appreciate so much, then when the wheel turns, then the fall will be very steep.
Therefore we like a more orderly evolution of the rupee exchange rate in both directions; when it is appreciating as well as when it is depreciating to check the volatility, check wild movements within a very short period. It should be a gradual movement.