RBI prefers glide paths over hard landings in the face of interest rates take off or cash flow: Dy Guv Patra


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The Reserve Bank of India (RBI) doesn’t like tantrums when it comes to taking interest rates off the ground or pulling cash, preferring downward trajectories over hard landings, according to the deputy. governor, Michael Debabrata Patra.

“… We don’t like tantrums; we like lukewarm, seamless transitions – descent paths rather than hard landings, ”Patra said in his speech at the Confederation of Indian Industry Financial Markets Summit.

Patra pointed to the RBI’s analysis of inflation dynamics indicating that the easing of headline inflation from current levels is likely to be reluctant and uneven.

“First, the distribution of inflation has skewed to the right with high variance – a large number of items are massed into a long, straight, fat tail, pulling the mean of the distribution to the right of the median. For us, this indicates the persistence of supply shocks.

“Second, over the coming months, the supply-increasing measures taken by the government are expected to address disruptions and imbalances, alleviating some cost pressures, but the pass-through of imported price pressures to prices. detail remains incomplete.

“Third, with respect to second-order effects, housing rentals remain low and rural wage growth is moderate, but rising staff costs suggest that emerging wage pressures are building in the organized sector as workplaces are filling up.

“Our surveys of manufacturing, service and infrastructure companies also indicate an increase in selling prices in the coming period,” Patra said.

Management of inflation levels

Given the outlook for growth and inflation and bearing in mind the production costs inherent in disinflation, he considered it pragmatic to envision a path along which the Monetary Policy Committee (MPC ) can guide the path of inflation in the future.

“The envisioned downward path is expected to bring inflation down to 5.7% or less in 2021-2022, less than 5% in 2022-2023 and closer to the target of 4% by 2023-24.

“The rebalancing of liquidity conditions will fit into this trajectory, but the choice of instruments is best left to the judgment of the RBI with its vast experience with such cuts,” Patra said.

Liquidity management

The deputy governor stressed that the RBI will remain in surplus mode and the liquidity management framework will continue in absorption mode.

“We hope that the demand for credit will pick up and that the banks will return to their main function of financial intermediation as soon as they can. This is the RBI’s natural and preferred way of reducing LAF surpluses, ”he said.

VRRR debate

Patra made it clear in his post that the suggestion to adjust the repo rate (the interest rate at which banks reserve short-term excess liquidity with the RBI) asymmetrically with respect to the repo rate. pension (the interest rate at which banks draw excess short-term cash from RBI) was made by an external member of the MPC.

In addition, market participants also gave RBI similar comments during the pre-policy consultations.

“Indeed, the RBI followed this advice and the written resolutions of the MPC not only in letter, but also in spirit. The asymmetrical corridor is by no means set in stone.

“With the return to normal, the markets will return to regular hours. They will require normal liquidity management operations and a regular and symmetrical LAF (Liquidity Adjustment Facility) corridor, as foreseen in the liquidity management framework announced in February 2020, ”Patra said.

Also see: Indian economy could grow 7.2% under constraint of Covid-19: UNCTAD

Currently, however, the need to revive and maintain growth on a sustainable basis and to mitigate the impact of the pandemic while keeping inflation within target for the future justifies policy accommodation. monetary policy reflected by abundant liquidity injected into the system and easy financial conditions, he added.

Referring to an argument that Variable Rate Reverse Repo Auctions (VRRR), whereby the RBI absorbs excess bank liquidity for 14 days, is effectively a way to remunerate excess reserves, thereby injecting additional liquidity into the system, Patra said emphatically, “It’s no, and I stress this, it’s not a signal of either liquidity withdrawal or interest rate takeoff.

“The latter’s signals will be conveyed by the position which is articulated by the MPC in its future resolutions,” he added.

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