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Reserve Bank of India (RBI) monetary policy will continue to remain vigilant and nimble, based on incoming data and developments, Governor Shaktikanta Das told a press conference after the meeting. of monetary policy. The world is in the eye of a financial crisis, but the Indian economy remains resilient and the rupee has seen an orderly depreciation. The central bank is focused on cautious intervention in the foreign exchange market and reserves, he said. Here are some excerpts from the conference:

Q. What stands out is the movement of currencies. It looks like the US Federal Reserve will continue to raise rates and there will be fallout in the currency market. What will your approach be when there is heightened volatility in the coming days, and will the decisions of the MPC (Monetary Policy Committee) be guided solely by domestic inflation factors?

A. MPC decisions, as you have pointed out, continue to be guided and will be guided by national factors. There are two components to the monetary policy framework; the first is inflation, the second is that we have to keep in mind the demands of growth. Other than that, currency market fluctuations are not a factor for the MPC to take into account. To deal with these situations, the RBI has other instruments that will be deployed as needed. So, just to confirm, currency movements are not the driving factors of our monetary policy decisions, which are based on domestic inflation and growth dynamics.

Also Read: RBI Monetary Policy September 2022: MPC Hikes Repo Rate By 50bps For 3rd Consecutive Time; here are the key announcements

Q. The Rupee has behaved in an orderly fashion and the stated policy of the RBI is to intervene only to mitigate market volatility. What is the volatility? How do you define this volatility?

A. Volatility would mean a sudden drop or some appreciation. Now, what this sudden is, it is not possible to quantify. It is based on our assessment; you have to see all around you what is happening in the whole world. What happens to other currencies, too, you should keep in mind; you have to keep in mind if the exchange rates are not synchronized with our macroeconomic fundamentals. So there are various considerations that go into our decision. But this is constantly monitored, almost daily on an ongoing basis, and decisions are made based on this.

Q. Does the RBI’s stance on IPL action remain the same while its stance remains ‘hosting out’?

A. Frontloading, if you see, to the best of my recollection, is not present in the MPC resolution or in my statement. Frontloading was mentioned by individual MPC members in their respective minutes. In the MPC resolution, or in the last three or four meetings and today, we didn’t use the word “frontloading”. This is the perception of each member. All we have said in the MPC resolution and in my statement is that it is calibrated to the evolving and anticipated situation.

Q. Has the third major shock, monetary policy tightening in advanced economies, changed the thinking of the RBI?

A The third major shock was indeed a shock. It further aggravated the overall situation in global financial markets. It has had its impact in creating excessive volatility in the foreign exchange markets in particular. When currency depreciations happen all over the world, they happen all over the world. Let me talk about the Indian situation. Naturally, there will be a whole scenario of imported inflation playing out, and this is built into our inflation projections. The third shock, as seen, added to the already heightened uncertainty that prevailed, and the forward guidance given by the US Fed in particular also speaks of future rate hikes, which are substantial. Thus, the overall tension on the global financial system has increased following the tightening of monetary policy and communication from the central banks of advanced countries. Nobody blames anybody. They have their domestic necessities and needs that they are taking action on, but we have to deal with the fallout.

Q. Can you give more assurance on liquidity?

A. Liquidity is not tight. The net LAF continues to be in excess for more than two years, except perhaps for two or three days, because of the SLF for the primary traders; if you take that into account, it went into deficit. But liquidity has remained positive throughout the past two and a half years or so. Second, many banks are holding excess SLRs and CRRs, and some of them have also started to draw them down because they need liquidity to sustain and maintain their lending operations. And then there’s this temporary movement of cash from the system as it moved into a different basket due to high GST and direct tax collections. Government spending in the second half is still very high. So if you take everything into account, the liquidity of the system is in the order of about 5 trillion dollars. So I think there is no need to worry about liquidity being suddenly tight.

Q: The RBI has been very good at transmitting interest rates on the lending side due to lending linked to repo rates, but on the deposit side rates are very slow to move. Do you think it’s desirable to have a similar link on the repository side as well?

A. Our external benchmark is related to lending rates. There is always excess liquidity in the system, but you all talk about shortage of liquidity. Credit is picking up, so obviously the banks need more resources, for which they must necessarily increase their deposit rates. Repo rates were raised by 190 basis points after the start of this cycle of rising interest rates. So with I think all of these factors taken together, banks are going to raise deposit rates in the future. We anticipate that in the future, you will see more traction when it comes to adjusting deposit rates.

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