As we mentioned clearly in the resolution and in my opening remarks, 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 where the implied volatility is higher now than in October although the price of oil has come down. With incoming data our projections will change and we will take a call as and when required.
The sharp downward revision for the inflation forecast with the midpoint of the second-half projection below the 4 per cent target. Why then has the stance been retained at calibrated tightening? Should we expect that as long as inflation is below that target, we will see a hold on rates?
: The volatility of data makes the decision somewhat difficult. I would like to stress that we have to look for inflation staying at the target rate for the medium term horizon. In some sense at Q2 of 2019-20, the inflation number is at 4.2 per cent, implying that as of now we are still slightly above the target at a 12-month horizon. So what has really happened is that the two surprises in food and oil in a really short period of time have brought the projections down quite significantly. Nevertheless the medium-term target remains above the headline target. We need to observe the data for a couple more months first to see if these recent prints are durable or not. The recent prints have also created massive uncertainty. What we are saying is that we really need some time in order to assess the inflation outlook better, and then we will be able to take further policy action if necessary.
What are your assumptions on non-food inflation? And what is the level of crude oil price that you are accounting for when making your projections?
Patel: In the resolution it is non-food non-fuel projection. As is usually the case if you look at the monetary policy report, which shows how we make adjustments with respect to inflation projections as the oil prices and exchange rate changes. So on oil we generally look at the futures curve and on the exchange rate we maintain the exchange rate as is prevailing now. We fix the rate for crude oil on the day we are making the projection, based on the futures rate on the previous day.
Did the MPC discuss a cut in the cash reserve ratio (CRR) to boost liquidity? Do you see the usage of Section 7 of the RBI Act as an attack on the autonomy of the RBI? And how do you view the call for governance reforms at the RBI?
I will only answer the first question. The CRR is not in the ambit of the Monetary Policy Committee and secondly, we see no reason to use the CRR when we have so many other instruments at our disposal, which deputy governors Acharya and N S Vishwanathan had enunciated. We have implemented [these changes] over the last two months for liquidity management, which are broadly market-based with some incentives. So CRR is not countenanced at all.
Instead of conducting open market operations which also have a yield impact, have you considered longer-term repos?
Patel: Open market operations address durable liquidity [whereas] longer-term repos, we have used 28-day and 56-day repos, at the end of the day help to smoothen relatively short-term and more frequent liquidity shortages and surpluses, that’s for frictional liquidity. So the two instruments are quite different.
Can you elaborate more on the relationship with the government?
Patel: As I said earlier that I would avoid those questions as we are here to discuss the Monetary Policy Committee resolution.
Are you in agreement with the recent comments of Dr Acharya that were made in public? Have you decided on the surplus fund transfer to the government?
Patel: I don’t think this is related to the MPC resolution. We are here to the MPC resolution and the macro economy.