Interview with Governor of the Reserve Bank of India - Mr. Das

Introduction

Interviewer: Governor Reserve Bank of India, Mr. Das
Key Topics: Interest rate cuts, neutral real rate, economic policy, potential growth rate, fiscal policies, banking sector, technological investments

Current Inflation:
- Latest print at 4.7%
- June inflation expected to be close to 5%
Guidance on Rate Cuts:
- Premature to discuss cuts; guided by actual numbers
- Inflation needs to be close to the target of 4%
- Economic uncertainty cited as a key reason
Global Context:
- Economic environment uncertain globally and domestically
- Advance guidance avoided to prevent misleading markets

Historical Analysis:
- RBI’s study: Neutral rate was 1.6-1.8%
- Post-COVID study: Neutral rate adjusted to 0.9-1%
Current Work:
- Another analysis in progress; results expected in a few months
Theoretical vs. Practical:
- Neutral rate a theoretical construct
- Policy driven by actual observable numbers

Current Growth:
- India’s GDP growth: More focused on the direction than exact numbers
- Projected growth for 2024-25: 7.2%
Drivers of Growth:
- Q4 FY momentum strong; continued strength in the current year
- Supply Side: Agriculture performing well, manufacturing and services sector robust
- Demand Side: Urban consumption strong, rural consumption picking up, export services growing
Expectation:
- India on a trajectory towards 8% growth
- Growth momentum considered structural

Dividend Payment to Government:
- Dividend transfer to the government based on a formula-driven process
- Economic capital framework by Bimal Jalan committee followed
Use of Dividend:
- It cannot be linked to RBI's expectation from the budget
Tax Treatment of Deposits:
- No specific expectation from the budget shared
Managing Debt and Inflows:
- Multiple instruments available including VRR, OMO, Standing Deposit Facility
- Bond index inclusion seen as manageable over 10 months

Stock Market Influence:
- Stock market stability observed but not a primary concern for rate policy
- Focus is on financial stability and preventing spillovers to the economy
Interest Rate Policy:
- Governed by inflation and growth targets
- No immediate changes expected in the stance of monetary policy

Rupee’s Stability:
- Driven by India's strong macroeconomic fundamentals
- RBI manages excessive volatility but does not tightly control the currency
Hedging Practices:
- Natural and automatic hedging by businesses helping
- Increase in hedging observed from January onwards

Tech Investments and UPI:
- Banks investing significantly in IT and cybersecurity
- RBI engaged with banks to ensure IT infrastructure keeps pace
Higher Provisioning for Project Finance:
- Draft circular for higher provisioning open for consultation
- Aim to strengthen the balance sheets of banks
Expected Credit Loss (ECL):
- ECL framework to be implemented in the financial year 2024-25

Consultative Process:
- RBI adopts a very consultative approach for regulatory decisions
Supervision and Penalties:
- Supervisory actions taken after extensive consultation and interaction with entities

Monetary Policy Committee Changes:
- Several members’ terms ending soon, changes anticipated
The Governor's Tenure:
- Focus on current responsibilities, not future term
Governor’s Reflections:
- Emphasis on maintaining stability and equanimity