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Justifying the rate hikes being undertaken by the Reserve Bank of India (RBI), Governor Shaktikanta Das on Saturday said the real interest rates have just turned positive after being in the negative territory for the last three years and that the RBI’s rate actions have been in line with its objective of maintaining price stability, as has been “mandated under the law”. Das further said that negative real interest rates — a situation where the inflation rate is higher than the nominal interest rate — for a prolonged period of time “can create instability in the financial system”.
“Please keep in mind that interest rates have just moved into positive territory. We have had negative interest rates for the last three years and the continuation of negative interest rates for far too long can create financial instability in the financial system, so the interest rates have just now moved into the positive territory. Negative interest rates for a long time have a lot of risks which have to be avoided,” Das said when asked whether the rate hikes by the RBI are affecting home loan EMIs and demand by homebuyers. He was speaking after the conclusion of the RBI’s customary post-budget Board meeting in Delhi which was attended by Union Finance Minister Nirmala Sitharaman.
Das said in a rising interest rate cycle, interest of depositors also have to be taken into account and market competition will decide both deposit and lending rates. “Second thing is that when interest rates are rising, there is also somebody called the depositor, his interest has to be taken into account. But the larger point is we are mandated under the law to maintain price stability which is an important component of financial stability and as a part of price stability requirements, the monetary policy committee is taking various decisions and our interest rate increase is part of that process. The rest of it, the deposit rates, the lending rates…they are all deregulated. It is left to the banks to decide their rates. Market competition will decide what should be the rate, both on the deposit side as well as the lending side,” he said.
On Wednesday, the RBI raised the repo rate by 25 basis points to 6.5 per cent, taking the cumulative increase to 250 basis points since May this year. There has been a lag by banks in transmitting it to depositors through hike in deposit rates. Inflation rate had stayed above the RBI’s upper level of 4+/- 2 percent inflation target for 10 consecutive months from January 2022, then moderated below sub-6 per cent level but continues to be above the 4 per cent level.
Stating that forward markets are indicating a benign outlook for crude oil prices, Das said the central bank is conservative in its assessment of the situation, adding that India could stand to gain from lower inflation if crude oil and other commodity prices stay low. He further said that the risks are evenly balanced as the global economic outlook is not as grim as six months ago.
“…if oil prices go down significantly and if there is an advantage of other commodity prices, it will work to our favour, in terms of leading to lower inflation. If the demand for oil (goes up) due to opening up of countries and due to higher growth in other countries, then the commodity prices may go up. The talk of a deep recession in many countries, including advanced countries, is behind us. Now, the talk around the world is either a softer recession or just a global slowdown. So, therefore, the risks are evenly balanced and we have to see how it plays out,” he said.
The RBI on February 8 forecast retail inflation for 2023-24 at 5.3 per cent, down from 6.5 per cent this financial year. The RBI’s latest forecast assumes $95 per barrel as the price for India’s crude oil basket, while it has averaged $93 per barrel so far in 2022-23, Das said.
Meanwhile, Sitharaman said the new income tax regime will benefit the middle class as it will leave more money in their hands, adding that it is not necessary to induce individuals to invest and they can take their own call for where to put their money. “…the way we allowed for standard deduction and also the rates which have been fixed, tax rates which have been fixed for different slabs, it has actually left more money in the hands of the people, the taxpayer, the household,” she said.
“I don’t think it is necessary for the government to even induce any such measures. A person who earns his money and who runs his household is wise enough to know where he has to put his money…So I’ve not discouraged him from doing it nor am I incentivising them to do anything in particular. It’s for him to take a call,” she added.
When asked whether the nudge towards the new income tax regime could affect India’s savings-investment equation and lead to the worsening balance of payments, RBI Governor said the external situation is “eminently manageable”. “…service exports are doing extremely well. Remittances are enough…in fact remittances are something like 27 percent (higher year-on-year) as per the latest data. Merchandise exports, there is talk that it is moderating. Yes, there has been some amount of moderation. But I think the annual (merchandise export) target of $400 billion seems to be very much getting achieved by the time we reach March 31. So the Balance of Payments situation is eminently manageable,” Das said.
On the issue of Budget not having any mention of crypto and the proposed norms to regulate it, Sitharaman said a single country could not hope to regulate crypto on its own and that India, as president of G20, was talking to all countries about whether a standard operating procedure can be created to regulate cryptocurrencies.
Regarding the National Financial Information Registry (NFIR) announced in the Budget, Das said the idea is to quicken the process of credit sanction and credit flow to the borrowers. “Lot of information is required by a bank before a loan is sanctioned. The idea is to create one registry where, to the extent possible, considering issues of privacy and other things…the idea is to provide a 360 degree kind of information system which will be readily available to the lending institutions to ensure that it quickens the process of credit flow,” he said.
