Summary: Q: You were the sole voice of dissent when it came to the rate hike. You had voted for 35 basis points, when the rest were for 50. You mentioned in the minutes that the real rate of more than one per cent of inflation were to fall more than expected could be dangerous for growth. So, what would be your preferred real rate? Ans: >Real rate should not be more than one per cent in the present state of economic recovery >A positive real rate is required, but it should not run above one per cent Q: You have mentioned a fear-driven over reaction when it comes to maintaining the rate differences with the US. Do you feel that there is a pressure in the MPC to respond to the Fed’s action? Ans: >MPC’s mandate is managing domestic inflation and growth >Interest differential does not matter for Indian exchange rate because India has caps on interest-sensitive inflows and have a low share of the markets >We need not worry about keeping up with the US Fed rates. Instead, we should calibrate our real rates to our inflation Q: You mentioned in the minute that India retains the policy space to smoothing global shocks. Does this imply space for rate cuts, if there were to be another adverse global development? Ans: >Our rates should be counter-cyclical to our domestic cycle. >Apart from the monetary policy, fiscal, foreign reserve management, capital flow management etc could be counter-cyclical >Strength and resilience of the financial sector also allows some policy space Q: Turning to liquidity, you mentioned the need to counter the global QT and possible outflow. We’ve seen that money market rates have moved higher and with regular instances of banks now tapping the MSF window. So, in your view, should the central bank provide liquidity when the current surplus drains out durably? Ans: >Durable liquidity is in surplus, with very short episodes where market rates stretch above the upper band >RBI has developed tools to manage short-term liquidity >Many large durable liquidity have gone out of the country because of foreign outflows >The country suffered in 2019 when there was liquidity squeeze >Surplus liquidity is essential for financial stability. But too much surplus is bad for financial stability Q: You also mentioned that the high repo rates in 2011, 2014 and 2018 led to a credit and investment slowdown. Given the fact that inflation still remains well out of target, how could the MPC achieve its target with minimal growth sacrifice? Ans: >Indian Monetary Policy had allowed too much stimulus after the global financial crisis. Then there was double deficit and various fragility >Monetary and other policy makers have learnt to be moderate in terms of being counter-cyclical, and not let the real rates become too negative or too positive >Monetary and fiscal coordination is required to bring down inflation >Have the policy space to moderate inflation without hurting growth too much
