RBI officials discuss volatility as rates increase

After the monetary policy committee of MPC raised the repo rate by 50 basis points to 5.90 per cent, the RBI management, including Governor Shaktikanta Das and Deputy Governor Michael Patra, spoke to the media on various issues. What is your approach to the volatility as it increases?

There are two components in the framework: inflation and the requirements of growth in mind. The decisions are based on twin objectives with priority being given to price stability. Currency market fluctuations, depreciation, or appreciation of the is not a factor for consideration, and there are other instruments that will be deployed as per requirements. Currency movements aren't the factors driving monetary policy decisions, which are based on domestic inflation-growth dynamics.

Volatility means sudden decline or appreciation. We have to keep in mind what is happening to other currencies. We have to keep in mind our domestic macroeconomic fundamentals, whether exchange rates are out of sync with our macroeconomic fundamentals.

What's the impact of the third shock on the current situation?

The guidance given by the Fed is going to be pretty big hikes and the third shock has added to the already heightened uncertainty that was prevailing. The stress on the global financial system has become more severe in the wake of the monetary tightening and communication by several advanced countries' central banks. Nobody is blaming anyone. The system is tight. It is not tight. Net LAF is in surplus for the past two years, except for 2 -- 3 days when it became deficit because of SLF for the primary dealers. The banks are holding excess SLR and CRR because they need the funds for lending operations. There is a temporary move from the system to a different basket because of the high GST and direct tax collection. The second half expenditure of the government is very high. If you take everything into account, the system's liquidity is in the order of 5 trillion.

Patra: Soft landing is for advanced economies, India is take off. Do you have an emergency buffer in mind for forex reserves?

Our vulnerability is less than in most emerging market economies as far as reserves are concerned. It is a process of constant evaluation that we do. In Q 1 of this year, there was a 4.6 billion accretion on a balance of payment basis. We are comfortably placed in our assessment, taking into account the level of reserves, different vulnerabilities, vis-a-vis the external sector, and our buffers are quite strong.

The current rate is still trailing the 2019 level. Patra said that the issue is not the sojourn but the journey. The journey has two milestones: when inflation gets into the tolerance band and when it aligns with the target.

There are expectations of 3.5 per cent plus CAD for the entire year of Patra: One thing that has happened is that oil prices have eased a bit, so the oil import bill will be lower. Windfall taxes have been slashed, so petroleum exports have increased 23 per cent in August. Tourism has picked up in a big way because services exports are doing well and now they are getting a boost from travel. We expect that the may widen modestly in the first half, but narrowly in the second half. We expect it to be under 3 per cent.