RBI Press Conference Live Updates: RBI Very Much An Inflation Targeting Central Bank, Says Das

India's Monetary Policy Committee kept the benchmark repo rate unchanged at 4%.

The reverse repo rate remains unchanged at 3.35%

The MPC voted 5-1 to retain the accommodative stance as long as necessary to revive and sustain growth on a durable basis, while ensuring that inflation remains within the target.

Addressing concerns that the RBI is de-emphasising its inflation targeting role, Governor Das said that is not the case. The RBI is very much an inflation-targeting central bank.

In response to a question on whether the RBI has surprised the market with the higher quantum of variable rate reverse repo auctions, Das said the central bank is providing a clear roadmap. It is only by December that the size of the size of these auctions will move up to Rs 6 lakh crore.

Replying to BloombergQuint's query on what signals will give RBI comfort to remove emergency accommodation via the large surplus liquidity and the low reverse repo rate, RBI deputy governor Michael Patra said the central bank is looking at signs of a more durable recovery. It is also looking to ensure that the inflation rate moving towards targets. "We are not looking at destination but journey," Patra said.

The sequencing, according to Patra, would follow a track along these lines: Stopping of liquidity addition, moving to variable rate reverse repo auctions, followed by next steps.

Speaking at a press conference after the policy review, RBI Governor Das countered concerns around asset price inflation due to the liquidity overhang. He said that the RBI has taken all domestic factors into consideration in deciding its stance and liquidity approach.

He reiterated that domestic factors will be dominant in policy decisions as opposed to moves by global central banks.

Governor Das, as always, peppered his comments with quotable quotes.

In explaining the central bank's liquidity stance, Das said: "We don't want to rock the boat when the shore is near as there is a journey beyond the shores."

He closed his speech by quoting Mahatma Gandhi to say: "To lose patience is to lose the battle."

Signal that the central bank will stay accommodative and patient in its unwinding?

In response to a question on the "surprise factor" in RBI's VRRR auctions, Das said that there is no surprise. The size of the VRRR auctions is only being raised gradually to Rs 6 lakh crore, Das said. This should give markets adequate time to adjust.

The RBI has decided to stop bond purchases under G-SAP. The RBI governor said that given the liquidity overhang and the absence of fresh government borrowing for GST compensation means that these bond purchases are not necessary.

The RBI will, however, continue to conduct open market operations as needed.

The RBI has also stepped up the pace of variable rate reverse repo auctions. It may also consider complementing the 14-day VRRR auctions with 28-day VRRR auctions.

A calendar for fortnightly VRRRs has been announced.

• Rs 4 lakh crore on Oct. 8

• Rs 4.5 lakh crore on Oct. 24

• Rs 5 lakh crore on Nov. 3

• Rs 5.5 lakh crore on Nov. 18

• Rs 6 lakh crore on Dec. 3

RBI has maintained ample surplus liquidity, said Governor Das. Level of surplus increased further in September, with absorption averaging Rs 9 lakh crore per day.

Potential liquidity overhang amounts to more than Rs 13 lakh crore. As the economy recovers, a near consensus view is that liquidity measures would need to evolve in sync with macroeconomic developments. "This process has to be gradual and non-disruptive," Das said.

The RBI has maintained the FY22 GDP growth forecast at 9.5%.

This includes 7.9% in Q2, 6.8% in Q2 and 6.1% in Q4. For Q1 FY23, GDP growth has been pegged at 17.2%.

CPI inflation is projected at 5.3% for the current fiscal year. In Q2, it is seen at 5.1%, 4.5% in Q3 and 5.8% in Q4, with risks broadly balanced.

RBI governor Shaktikanta Das said that the recovery of Indian economy is gaining traction. India is in a much better place today. However slack in the economy still remains. Contact intensive sectors are still lagging, the Governor said.

Commenting on inflation, Das said that inflation has been below the RBI's projections but core inflation however remains sticky.

The evolving situation requires close vigilance, he added. "Efforts to contain cost push pressures through a calibrated reversal of fuel taxes could contribute to lowering of inflation," he said.

India's monetary policy committee and the Reserve Bank of India will announce a review on Friday. The review comes against the backdrop of stabilising growth and moderating inflation. This may mean that the MPC stays on hold but concerns about the large surplus of liquidity are rising.

All 30 economists surveyed by Bloomberg as of Wednesday expect the six-member Monetary Policy Committee to leave the repurchase rate at 4%. You can read more on the consensus expectations here.

A small minority of economists, however, are calling for the central bank to raise the reverse repo rate, which is currently at an emergency level of 3.35%. Samiran Chakraborty, chief India economist at Citibank explains why.

Economists don't expect the RBI to change their growth forecast, which currently pegs FY22 growth at 9.5%. However, since inflation has eased quicker than expected, the central bank may tweak its inflation projections.

There might be a minor downward revision of the earlier 5.7% CPI inflation forecast, with upside risks, said Saugata Bhattacharya, chief economist at Axis Bank.

The more medium-term question facing the central bank is whether the above-target inflation is transitory. JPMorgan's chief India economist Sajjid Chinoy explains why complacency on inflation is avoidable.

Bond markets are eagerly looking for clues on liquidity.

At close to Rs 12 lakh crore, the core liquidity surplus, which includes government cash balances, is at a historic high. Does the economy need so much excess liquidity? Should the RBI start pulling back?

For now, the markets are anticipating smaller bond purchases under the G-SAP programme in the third quarter and longer-term variable rate reverse repo operations. Any effort to withdraw liquidity from the system is unlikely.

To read just how much accommodation has been provided through liquidity and India's shadow policy rate, read this piece from A Prasanna and Abhishek Upadhyay of ICICI Securities.