‘₹1 lakh-cr. infusion will enable banks cut rate’

Operation Twist aimed at rate transmission in the corporate bond market, says the RBI Governor

February 06, 2020 10:19 pm | Updated 10:49 pm IST

Mumbai, 22/12/2019: RBI Governor Shaktikanta Das during an interview with The Hindu at RBI headquarter in Mumbai. Photo: Prashant Nakwe / The Hindu

Mumbai, 22/12/2019: RBI Governor Shaktikanta Das during an interview with The Hindu at RBI headquarter in Mumbai. Photo: Prashant Nakwe / The Hindu

RBI Governor Shaktikanta Das responds to various queries during the post monetary policy interaction with the media:

What’s the reason behind the long-term repo window and CRR exemption for retail, MSME loans?

Basically, it is an effort to ensure better monetary policy transmission. Because we are giving it at the policy rate… so ₹1 lakh crore we want to infuse in the banking system which will enable banks to reduce lending rate.

Are you looking at a certain level of CPI inflation below which you will be in a position to cut rate?

If you see last year’s experience of the monetary policy, it was full of surprises. The unseasonal rains of October and November were completely unexpected.

Because of that, onion prices alone accounted for 328 bps in food inflation and about 200 bps in overall inflation. As it looks now, headline inflation has peaked for the current quarter.

Inflation is expected to go down further. Then we have to see how quickly the downward slope actually plays out, on the basis of which MPC will take a decision.

I cannot say at which point MPC will take action because [there are] so many other factors which contribute to and impact inflation. MPC, like in 2019, will be very very proactive even in 2020 [in cutting rates].

Will the long-term repo operation replace open market operation (OMO)?

M.D. Patra : Long-term repo operation will not replace the OMO. The idea is to some how help banks to reduce cost of funds. It also gives them some assurance of durable liquidity in their hands.

What were your objectives of Operation Twist? If you wanted to reduce rates, you could have cut repo rates?

There are several options available to the RBI. You have suggested one option, but we have decided to exercise the other option.

We are keeping the surplus liquidity for better monetary policy transmission.

Operation Twist was conducted to ensure better monetary transmission.

The corporate bonds are a benchmark to the lending rate of the G-sec segment.

So, by Operation Twist, you are able to soften the yields of government securities at the longer end, that acts as a benchmark to the corporate loan rate.

The effort was mainly for monetary transmission in the corporate bond market, not so much to manage the yield of government securities.

Why is the CRR exemption only for six months?

It is a balanced call we have taken. Too early to say if we will give an extension.

Under the FRBM Act, once the trigger is exercised, the government can also monetise the deficit with RBI. Does it concern you?

Let me be very clear, at the moment there is no such plan.

Despite the fiscal deficit number going up, the open market borrowing number for the current financial year remains the same and next year, the increase is only by ₹70,000 crore. And if it is calculated as a percentage of GDP, then it is lower than the current year borrowing.

Is the RBI concerned over fiscal slippage?

What the RBI’s concern as a debt manager of the government is, is the borrowing numbers. As I have said, next year’s borrowing increases by ₹70,000 crore which is lower as a percentage of GDP which we have in the current year. We do expect it will go through in a non-disruptive manner.

The response by the RBI staff to opt in for the specialised supervisory and regulatory cadre was not good. What was the reason?

That is an internal matter, an in-house issue. It will be resolved.

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