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Informist, Thursday, Aug 8, 2024

--RBI Patra: See much better balance in fincl liquidity conditions 

--RBI Patra: Middling the call rate in LAF corridor 

--RBI Patra: Call rate should ordinarily be in middle of LAF corridor 

--RBI Patra: Call rate is our operating target 

--RBI Patra: Call rate reflects monetary policy stance 

--RBI Patra: Neutral interest rate reflects better econ performance 

NEW DELHI - The recently released estimate of India's neutral interest rate shows that the current level of the policy repo rate at 6.50% is "probably exactly right", Reserve Bank of India Deputy Governor Michael Patra said today. The Monetary Policy Committee today left the repo rate unchanged at 6.50% for the ninth consecutive meeting with a majority of four to two.

India's neutral rate of interest--the real interest rate that is neither expansionary nor contractionary for the economy-–rose to 1.4-1.9% during Jan-Mar from 1.1-1.3% during Oct-Dec 2021, a central staff paper released last month showed. Real interest rate is the rate of return over and above the expected rate of inflation in an economy. With a 6.50% repo rate and the RBI projecting CPI inflation at 4.5% in 2024-25 (Apr-Mar), the real interest rate would be 2%.

The rise in the natural rate of interest was mainly driven by growth in potential output to around 7%, the staff paper had said.

The two external members of the panel, Jayanth Varma and Ashima Goyal, who voted in favour of lowering the repo rate by 25 basis points today, have previously said that a real interest rate of around 2% is too high and would lead to a growth sacrifice. However, Patra and RBI Governor Shaktikanta Das differ.

"As we suspected, the neutral rate is actually reflecting the better performance of the economy," Patra said at the post-monetary policy outcome press conference. "The major driver of the neutral rate is potential growth, and that has started to rise. If you factor in the neutral rate, you will see that the current level of the policy rate is probably exactly right."

The rate-setting panel also retained the "withdrawal of accommodation" policy stance today. Patra said the policy stance is reflected by liquidity, which is the operating procedure of monetary policy, and also by the call rate, which is the operating target of monetary policy.

The deputy governor said that liquidity conditions are much more balanced right now, than a few months ago. "There was a peculiar liquidity situation some time ago where the government balances were being built up and spending was not happening and liquidity had tightened," Patra said. "Now we see a much better balance in liquidity conditions."

Balanced liquidity conditions have helped the central bank keep the call rate in the middle of the liquidity adjustment facility corridor at 6.50%.

"So we are middling the call rate, it is in the centre of the corridor, and that's where we would like it to be ordinarily," Patra said. "All our actions are intended to continue maintaining that."

Earlier in the day, Das said that the central bank will ensure that money market interest rates evolve in an orderly manner. The central bank will also continue to be nimble and flexible in its liquidity management operations, keeping in view the evolving liquidity conditions, Das said.  End

Reported by Shubham Rana

Edited by Vandana Hingorani

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