‘Cash Reserve Ratio not in MPC ambit’

Many other instruments available

In the post-policy interaction with the media, RBI Governor Urjit Patel declined to answer questions on the issues of RBI autonomy and rift with the government.

You have given some hope on interest reversal, that is, in case the upside risks [to inflation] do not materialise. So when will the reversal happen?

Urjit Patel: We need few more data points to ascertain the durability of the decline in inflation that has taken place in a very short period of time. Especially with respect to oil, the implied volatility now is higher than October, though the price of oil has come down. So, with incoming data, our projections will change, so we will take a call as and when required.

We have seen a sharp downward revision in the inflation forecast. Why then has the stance been retained at calibrated tightening?

Viral Acharya: In some sense, the volatility of the data makes the decision-making somewhat difficult. I would like to stress on two things, we have to look for inflation staying at our target at medium-term horizon. So, in some sense, Q2 of 2019-20, the number is 4.2%, which is basically implying that as of now we are slightly above the target in the 12-month horizon.

What has really happened in that is the two surprises — food and oil — in a short period of time, brought the projections down quite significantly. Nevertheless, the medium-term target remains above the headline target. I think we need to observe the data for a couple of more months to see if the recent prints are durable or not. What we are saying is, we really need sometime to access the inflation outlook better, then we will be able to take policy action, if necessary.

There was expectation from analysts for reduction in cash reserve ratio. Was it discussed in the monetary policy committee? Why has it been retained?

Urjit Patel: The CRR is not in the ambit of MPC. We see no reason to use the CRR when we have so many other instruments at our disposal, which we have implemented in the last two months for liquidity management, which are broadly market-based with some incentives.

Instead of doing OMOs which has an impact on yields, even you are balancing out with intervention in the foreign exchange market. Why have you not considered longer term repos? because it will have much lesser impact on yields?

Urjit Patel: The open market operations (OMOs) address durable liquidity, and longer term repos — we have used 28-day, 56-day repos — help to smoothen the relatively short term and more frequent liquidity shortages and surplus. So, that is for frictional liquidity. So, the two instruments are quite different.