No Cause For Complacency On Inflation, Says RBI Governor

Reserve Bank of India Governor Shaktikanta Das kept markets guessing on the monetary policy committee's future course of action as he flagged potential risks from inflation.

"We have to remain alert. There is no cause for complacency. Especially, we'll have to see how the El Nino factor, which has been anticipated, plays out," Das said during his address at the CII Annual Session held in Delhi on Wednesday.

The governor's comments on inflation precede the Monetary Policy Committee meeting scheduled from June 6 to 8.

Outlining RBI's approach to policy decisions, Das said the central bank's endeavour has been to be prudent, proactive, and to act in time.

"I think looking back, I can say that we were prudent then, when we decided to increase the rates in a surprise meeting, and we are also prudent now, when we have decided to take a pause," Das said. The MPC's assessment was that a rate increase of 250 basis points has been carried out and the impact should be allowed to play out, he said.

Central banks, regulatory authorities, and businesses in particular have gone through fire due to the string of black swan events that emerged over the last few years, Das said, referring to the Covid 19 pandemic, Russia's invasion of Ukraine, supply-chain disruptions, and tightening of financial conditions globally.

Das said the RBI has also remained proactive when it comes to managing liquidity at the systemic level.

The central bank also conducted a variable-rate reverse repo on Friday, following concerns raised by banks about overnight financing rates staying above the repo rate on a sustained basis.

"Our analysis was that overall, at the system level, there was surplus liquidity of about Rs 1 lakh crore, but in certain banks and institutions, there was a lack of liquidity. So, we undertook this reverse repo auction of Rs 50,000 crores, against which we got a response of Rs 47,000 crore," Das said.

While central bank intervention in foreign exchange markets is often frowned upon by many international institutions, when the cycle turns, we have to look after ourselves, Das said during his address.

"I'm indeed very happy to note that the IMF has subsequently recognised that it is perfectly within the rights of ... emerging market economies to build up reserves and create capital buffers to deal with situations when there is foreign exchange outflow," he said.

Stability in exchange rates is important, as it gives confidence to businesses and investors, both international and domestic, Das said. "We don't buy an umbrella to just store it as a decoration piece in our residence. We were quite confident that the cycle will turn, and thankfully, we are also fortunate that the cycle has turned."

The internationalisation of the Indian rupee is a process and not a target, Das noted in his remarks, referring to the progress in expanding the currency's footprint. It's directly linked to the volume of "our world trade, and while India's is growing, it needs to grow even more", Das said.