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Shaktikanta Das, Governor, the Reserve Bank of India, says “given the uncertainties that we have, including weather-related events, we would like inflation to durably be around 4%. It cannot be just a one-off number or one-month number touching 4% which will give us satisfaction. It has to be sustainable and durable at around 4%. That will give us greater confidence, but the direction is very clear. Inflation is on a downward trajectory.

Ever since you took over as the Governor of Reserve Bank of India, December 2018, is this the best macro and the economy set up we have seen?
Shaktikanta Das: Yes, in a long time, not just in the last five years. Of course, in the last five years, we have seen several turbulent moments initially coming from the collapse of the IL&FS, followed by the COVID and many other external developments. So, we have gone through a very turbulent period.

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But in quite a while, over a period of time, over a period of years, the confluence of factors that we have today is perhaps one of the best. Look at the GDP, you mentioned about GDP, you look at the fiscal consolidation which of course is on the fiscal side; look at current account deficit, look at inflation, and you look at the fact that inflation has been brought under some kind of a control without sacrificing or without paying the kind of heavy price which perhaps some of the economies have paid to keep inflation under control.

Therefore, if you look overall, in terms of growth, in terms of inflation, in terms of other macro parameters, like the current account deficit or the economic activities, I think in all respects and in terms of overall stability of the financial sector, the overall stability in the banking sector, the NBFC sector, I think it is perhaps one of the best confluence of factors.

But having said that, this is a philosophy which we follow internally, there is no room for complacency at all because a problem can suddenly arise from any corner of the world, which may complicate the challenges for us. So, there is absolutely no room for complacency and we need to remain focused and remain committed to our goal of maintaining financial stability and supporting economic activity in the country.

But looking at the current set of data points and the macro circumstances, can I say that you do not see a problem that is on the horizon? If there is an external shock, something unknown which we are not privy to right now and that could be an episodic issue? Looking at the data points and the permutation and the combination, you do not have a problem on the horizon, per se.
Shaktikanta Das: More or less you are right, accepting that geopolitical crisis, new flashpoints can originate any time. There are weather-related challenges; weather events which can happen and which do happen without much advance notice, accepting that at a structural level I do not see any major problem. But as I made a reference in the last MPC statement of mine, I think global debt, it is not so much a problem in India because our debt to GDP is at a certain level and it is expected to moderate, about which I have talked about in the last MPC statement and when I say our debt to GDP, I mean the country’s debt vis-a-vis external lenders and the debt of the state and the central governments put together, these are all within manageable limits. These are set to moderate in the coming years. But if you look at global public debt in some of the advanced economies, with their large fiscal deficits and with a large percentage of debt to GDP ratios and if this continues, it can pose bigger challenges particularly to the emerging market economies. But that is not something which will affect India immediately and also among all emerging market economies, India is much better prepared to deal with such challenges.The Reserve Bank of India was clearly ahead of the curve when they released their GDP projections for FY24. RBI number was 7%. The consensus number was 6.3%, 6.5%. Post the last GDP trend, will RBI remain ahead of the curve and upgrade their FY25 GDP estimates also? Is there a case for it?
Shaktikanta Das: The next monetary policy is just about a month away and our research teams are working on the inflation and on the GDP numbers. So, I do not want to pre-empt what conclusions they will come up with. But as I look at the outlook for growth, we said last year, if I recall, sometime in October, towards the end of October, I had said in one event that the GDP is expected to touch and perhaps it will touch…, it will be in the order of 7%.

You are right, absolutely. The market was at 6.3%, 6.5% and slowly the market adjusted to that. But today the number for the current year given out is 7.6%. So, now once the NSO gives a particular data, we work on that number because that is the final authority on GDP numbers. Let me split it this way.

First, let me talk of the current year, then the next year. So far as the current year is concerned, the momentum of economic activity has been very good, has been robust and we are now in the first week of March. Given the kind of momentum of economic activity, the growth momentum which we are witnessing and the kind of high frequency indicators, the data points which we keep getting on a continuous basis, I would not hesitate to say that there is every possibility of the 7.6% growth for the current year being exceeded.

Now, we have the numbers for the first three quarters. The implicit growth for the Q4, that is the current quarter, is 5.9%. Our sense and understanding of the high frequency indicators and the momentum of economic activity tells us that this 5.9% growth in the Q4 could be exceeded and when that happens, obviously, the growth will be more than 7.6%. I think there is quite a good chance of GDP number for the current year being very close to 8%.

Now, coming to next year, we have given a growth projection of 7%. Other forecasters, including international agencies, have given much lower projections for next year. For next year, we stick to 7% and we are sticking to 7%. But I will wait for the next MPC, our research teams to do their analysis, but at the moment as I speak to you, I would stick to 7% which we have projected for next year.

But if high frequency data points are so strong, then internal data purely is pointing towards a strong economic expansion, can I at least infer that?
Shaktikanta Das: There is definitely a strong economic expansion. Take 2021, which was the Covid year when we had negative growth. Thereafter, the revised number which NSO has given out is 9.7% for 2021-2022. Then the next year, which was earlier 7.2%, was revised slightly downwards to 7%. This year, NSO is giving 7.6%. So, 9.7%, 7%, and 7.6%. If you take the average, it is 8%. The 7.6 can be closer to 8%. Therefore, the momentum is continuing to be very strong and so therefore we are quite optimistic about next year. I say it with a reasonable amount of confidence based on our internal analysis and research that 7% next year is definitely very much on the table.

Last time when we spoke, the elephant in the room was inflation. Now inflation has come down. A lot of measures have been taken by the RBI, commodity prices have also been benign. Now that inflation is moving towards your guided band, which is below 5%, more towards 4%, is it time for the Reserve Bank of India to change their stance?
Shaktikanta Das: Since you use the analogy of elephant, I would like to tell you that as it looks, the elephant has gone for a walk. The elephant can come back any time. Why I am saying the elephant can come back any time is because there are a couple of major uncertainties which I mentioned. One is the geopolitical, how the geopolitical situation evolves, what kind of supply chain challenges it will pose.

The second thing is the weather-related events, which immediately impact our food prices. So, these are the two major uncertainties. And the latest inflation print which we have for the month of January, that was released in the month of February, the inflation was 5.1%. We are still 110 basis points away from our target of 4%. We are completely focused. We are analysing all the incoming data to see the outlook on inflation. But having said that, let me say that the trend, the direction of inflation, it is not just the month-on-month or the monthly numbers, it is also the direction on which the inflation numbers are evolving.

Immediately after the Ukraine war, the inflation was 7.8%, that was on April 22. After 7.8%, it has come down to 5.1%. In between, it touched below 5%, but it is now at 5.1%. So, we are now focused on taking inflation to the target of 4% and that is our focus. Given the uncertainties that we have, I mentioned weather-related events and all, we would like inflation to sort of durably be around 4%. It cannot be just a one-off number or one-month number touching 4% which will give us satisfaction. It has to be sustainable and durable at around 4%. That will give us greater confidence, but the direction is very clear. Inflation is on a downward trajectory.

If I have to use cricket terminology, you always refer to cricket. Post war, RBI had no option but to adopt a T20 format. They had to go for speed and power and impact. Are we back to the classic test match style now where it is about form and not speed, it is about style and durability and sustenance?
Shaktikanta Das: We play ball-by-ball. I mean, again, using a cricket analogy, we play ball-by-ball. And even in T20, for information, if you see the pattern of T20, around the 10th to 13th-14th over usually there is a kind of a slight moderation in the pace, usually. But on a more serious note, at that time front-ended action was required and we took the front-ended action, including an off-cycle meeting which we held of the MPC in May of 2022, where we announced a repo rate increase of 40 basis points. The market was taken by surprise, but I was surprised because if you read the April 22 MPC statement, we had given clear indications that we will be moving very fast. But that is all history.

So that was a time when front-ended action had to be taken and now for several meetings, it is a pause, both in terms of stance and on the rate front. So, we are watching the numbers, incoming data points with regard to prices, and we make our evaluation of the evolving outlook. Based on that, the future action will be decided.

What is RBI’s view on the state of the economy? All kinds of alphabets have been attributed to describe the post Covid recovery. Is the post COVID recovery really unreal? Is there stress on rural economy and do you see that changing?
Shaktikanta Das: I think overall the economy is doing very well. I just mentioned that in the last three years, including the current year, the average growth is 8%. Now, you cannot reach 8% growth just like that. Even for the number which has now been given out, 7.6% for the current year, now various theories are being given around. I am not dismissing the analysis which is being explained. For example, there is a belief that because the subsidy expenditure has come down, GVA plus tax, gross tax collections minus subsidy because the subsidies are less so therefore the GDP number is looking high. Various explanations are given.

I would again like to go back to what I mentioned about momentum. The momentum of economic activity continues to be strong and in the rural sector, now the demand for two-wheelers, which is an indicator for rural demand, is back again. It is recording high growth for the last couple of months. Tractor demand is slower. But the point is tractor demand is a little slower. It is not negative. The growth is little less compared to the previous months. But on the back of double-digit growth for several months, a slight moderation should not be seen as an indication of slowing rural demand. It is not so.

Therefore, two-wheeler demand continues to be strong. Tractor demand is quite stable. And then the demand for Mahatma Gandhi NREGA, has also come down. Whatever gap was there in the net sown area, has been filled up and rabi crop is expected to be good. Wheat crop is expected to exceed last year. But then we have challenges with regard to a few other crops like pulses, etc. So, overall, rural demand is showing signs of revival or perhaps, let me put it this way, that rural demand has definitely improved compared to what it was, let us say, one year ago.

So far as urban demand is concerned, urban demand continues to be very strong. Investment activity continues to be strong, driven by government capex and private capex also beginning to pick up, particularly in certain key sectors like steel, those sectors related to construction activity, textiles, chemicals.

Private investment is also picking up. Capacity utilisation is also very high and this is not just reflective in RBI’s survey, but also in the various industry associations and chambers of commerce. They do a survey among their members. Yesterday, we had a detailed interaction with various industry and trade bodies and the apex associations at the All India Association. So, their internal survey among their members is also showing that the capacity utilisation is very high and there is an expectation that private investment will also pick up.

Demand for bank credit has also picked up. So, if you put all these things together, the economy is doing very well. And compare ourselves among the other countries, we are living in a world and it is always you have to see it in a comparative sense. If today, we are recording, let us say, around 7.6% or between 7.6% and 8% growth. Please see where the other countries are. If other countries were doing 9% and 10% growth and we are still at 8 or a little below it, it is not good. But look at the other countries. So, therefore, I think the economy is doing very well. And we are quite optimistic about the growth outlook for India.

I would like to draw your attention to liquidity, given the growth parameters and the inflation and the growth dynamic. Is the system now ready for liquidity injection because liquidity on a net basis in the last 24 months is actually less. Is the system now ready to accept that back in?
Shaktikanta Das: Liquidity was in surplus till about September last year. Thereafter, it has turned into deficit and there are various factors external to the Reserve Bank, that is, external factors. External meaning, I do not mean foreign, but external to the RBI. For example, the currency in circulation plays an important role in impacting the quantum of liquidity, the currency in circulation, government expenditure, and the inflow of forex.

When foreign exchange comes in, these are the factors which are external to the RBI. As we pointed out in the last monetary policy statement, we have been quite nimble in our liquidity actions. We are almost simultaneously, during the last fortnight or one month, injecting liquidity by way of variable rate repo operations. We are also periodically taking out liquidity by way of variable rate reverse repo auction. So, it is both VRR and VRRR.

In fact, in the last few days or last few weeks, we have been doing more than one auction on the same day. So that is the kind of nimbleness which we have demonstrated to manage liquidity. But for the last four weeks or so, liquidity has been in surplus and that is reflected in the fact that the overnight call money rates, the overnight call rates, which were earlier hovering around 6.75% to even sometimes touching 6.8%, came down to about 6.6% or 6.7%. Yesterday, in fact, it was below 6.5%. Therefore, there is adequate liquidity in the system. It is not deficit and that is clearly reflected in the overnight call rates.

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