Even as the Reserve Bank of India (RBI) is in the interest rate hike mode amid rising inflation in the country, its Governor Shaktikanta Das on Monday said the expectation of a rate hike is a no brainer and the RBI wants to increase repo rates in the next few meetings. He added that the off-cycle meeting was conducted in early May because the RBI did not want a much stronger action in June.
In an interview with CNBC-TV18, Das said, “Broadly, the RBI would like to raise the rates in the next few meetings or in the next meeting at least. One of the reasons behind the off-cycle rate hike in May is that we didn’t want a much stronger action in June which is highly avoidable… You cannot be cutting rates at 100 or 70, 80 basis point… these are random numbers, please don’t interpret.”
In the off-cycle monetary policy earlier this month, the RBI hiked the repo rate by 40 bps to 4.40 per cent from 4 per cent earlier.
On asked if pre-COVID-19 levels can be reached by August, the RBI governor said, “In the larger sense, liquidity as well as interest rates. If you read my minutes carefully, when we said pre-Covid, we were talking about growth in terms of pre-Covid levels, we were talking about liquidity in terms of pre-Covid levels, we were also talking about rates in terms of pre -Covid levels. The expectation of a rate hike is a no-brainer. There will be some increase in repo rates but by how much, I will not be able to tell now.”
On the liquidity conditions, Das said the central bank will normalize liquidity conditions in a multi-year time cycle. “During the press conference, I said multi-year could be 2 years or 3 years. Now, to what extent and how we are going to sort of bring down the liquidity will depend on the evolving growth inflation dynamics. That is part of our strategy.”
He added that second thing is that the requirement of liquidity or the adequacy of liquidity in 2019-20 will be different from the adequacy of liquidity in the current year because the economy is also growing. The various activities are now rebounding.
“So, that will be a moving figure. Our position on liquidity is that we would like to normalize the liquidity, remove the overhand of the liquidity in the system and move to a situation where there is adequate credit available in the system to meet the productive requirements of the economy and to support the credit offtake which will happen,” Das said.
He added that when credit offtake takes place, a part of the liquidity also gets absorbed by that. So, the RBI’s target is to eliminate the overhang of liquidity over a time period of 2-3 years and, at the same time, ensure adequate liquidity for the system.
“Learning form the past experience, we want to avoid a liquidity trap. We don’t want to get into a chakrabyuh situation without knowing the exit route… We will bring down liquidity in a calibrated and phased manner,” Das said.
Before the off-cycle monetary policy hike, the last time the repo rate was cut was in May 2020 and had been kept unchanged since then. The latest hike came into effect immediately. Further, the cash reserve ratio (CRR) was earlier this month also hiked by 50 bps which will exert further upward pressure on interest rates.
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