Central bankers have always been at the forefront of the economic battleground, whether it’s fighting the ravages of COVID, or now trying to rapidly roll back inflation. The Reserve Bank of India (RBI) has been the first line of monetary defence for the country, a position it asserted, when on May 4, it dropped the unexpected off-cycle rise in rates. Inflation nevertheless remains at 7.8 percent. CNBC-TV18’s Latha Venkatesh is in conversation with Shaktikanta Das, Governor of the Reserve Bank of India (RBI), on inflation and a wide spectrum of topics.Q: First up, in what looks like a synchronised action from the Centre and RBI after your May 4 policy, we saw that bunch of fuel price fuel excise duty cuts. What is your sense of inflation? When do you think we get to that coveted 6 percent and below?A: The first thing you mentioned about coordinated action— the way I see it is that we have entered another phase of coordinated action between the fiscal and monetary authorities to check inflation. RBI has taken a number of steps over the last two or three months. In fact, I would say we have been taking steps much earlier, but somehow certain sections of the market have missed it. I will explain. The government has now taken action on wheat and various kinds of intermediaries, raw materials, and of course, the big one on petrol and diesel. All these put together will definitely have a sobering impact on inflation, going forward. The petrol-diesel tax reductions have been announced in the weekend and in RBI, we are back on the drawing table. In fact, we are on the drawing board almost every day. We will rework our numbers and give out the numbers in the next MPC in the first week of June.Also read: RBI governor explains why he moved from fretting over growth to worrying about inflationQ: The reason why I am asking you is, I did a CNBC-TV18 poll of economists, and they don't see the 6 percent mark coming till the fourth quarter. So, it looks like you will have three quarters of CPI above 6 percent?A: You see October is still quite a distance away. So let us not try and speculate from this point of time. There could be other actions also in the intervening period. We are in May, so [there are] still about five months left. So, let us see how it plays out. I cannot give a number today, because we are working it out. I think the next MPC in June is the right moment, when we can say what is the inflation projection that we have in mind. You see by and large — what you call the ‘professional forecasters’ — their number moves in tandem with the RBI. Their numbers are sometimes lower, at times higher.Q: Now it is distinctly higher sir. Last summer it was 5.7 percent pre-fuel cut, and the average on the street was 6.50-6.8 percent?A: Last year, or rather this year in February, when we gave 4.5 [percent], many people thought was very optimistic. I can explain to you why it was not optimistic. Then the professional forecasters were about 5 percent, and subsequently when we moved to 5.7 percent, I think the professional forecasters were around 5.5 or around 6 percent. So both are moving in tandem. The same will happen when the RBI number is given out in June. Further, without working out the numbers and in the run-up to the MPC (Monetary Policy Council), it will not be correct on my part to give out an update.Q: Let me come to the rate hikes. You seem to give the impression that you want it to come to 5.15 percent, that is the pre-COVID level, quickly. Have we understood it right that you want to come there by say August?A: Broadly, you are right to the extent that RBI would like to raise the rates in the next few meetings or in the next meeting at least. I myself have said in my minutes that one of the reasons for the off-cycle meeting in May was that we did not want a much stronger action in June, which is highly avoidable. You cannot be cutting rates at 75 or 100 basis points or 80 basis points. Now, these numbers which I am mentioning — 75, 100 or 80 — are random numbers. Please don't interpret them as the number from the next MPCQ: You said pre-COVID and that is what 5.15 percent is?A: No, I said pre-COVID in a larger context of liquidity as well as interest rates. If you read my minutes carefully, when we say pre-COVID we are talking about a growth in terms of pre-COVID levels, we are talking about liquidity in terms of pre-COVID levels. We are also talking about the rates in terms of pre-COVID levels. So, the expectation of rate hike is a no brainer. There will be some increase in the repo rates, but I will not be able to tell now by how much. To say that [it will be] 5.15 [percent] may not be very accurate.Q: The Patra statement said we will have reached neutral accommodation if we go to the pre-COVID level, so that is why 5.15 is something the market is clutching to? A: In MPC, we have lots of discussions and deliberations, and then we come to some conclusion.Q: You just mentioned you want liquidity to come back to pre-COVID levels. Now, the pre-COVID level as of say February or January 2020 was Rs 2.5 lakh crore surplus liquidity. Is that also something you want to get to quickly?A: No... we have said that we will normalise liquidity conditions over a multi-year time cycle and during the press conference I said the multi-year could be two years or it could be three years. Now, to what extent and how we are going to bring down the liquidity will depend on the evolving growth inflation dynamics — that is part of the strategy.The second thing is [that] the requirement of liquidity or the adequacy of liquidity in 2019-20 will be different from the adequacy of liquidity in the current year, because the economy is also growing, business activities are now rebounding. So, that will be a moving figure. Our position on liquidity is that we would like to normalise the liquidity, remove the overhang of liquidity in the system and move to a situation where there is adequate credit available in the system to meet the productive requirements of the economy and to support the credit offtake which will happen. Also, when credit offtake takes place, part of the liquidity also gets absorbed by that. So, our target is to eliminate the overhang of liquidity over a time period of two to three years and at the same time ensure adequate liquidity for the system.Q: You hiked the CRR as well. You have also been selling, albeit small quantities on the NDS government bonds. All these are liquidity draining steps, and therefore I am asking whether the initial steps will be a little faster?A: No, you can't say that. You see this intermittent intervention in the NDS-OM market is not emanating from there. There are so many complex developments taking place, and from time to time we do intervene for various complexities of factors. Liquidity withdrawal, if you remember, in one of my earlier interventions. I had said that by learning from the past experience, we want to avoid a liquidity trap.Also read: RBI sets up committee to review customer service standards at banks, NBFCs, payment operatorsWe don't want to get into a chakravyuh situation without knowing the exit route. So, all our liquidity infusion, targeted longer-term refinancing operations (TLTROs) or whatever we did, they had a sunset date. For example, we had announced a total liquidity support of about Rs 17 lakh crore, of which the actual offtake was about Rs 12 lakh crore, and of that Rs 5 lakh crore has already been returned. The rest Rs 7 lakh crore or so still continues to be there in the system, of which in the overnight SDF, we get back about Rs 2 lakh crore and the rest is in the variable rate reverse repo (VRRR). Therefore, we will bring it down, but in a very calibrated and phased manner.Q: Let me come to rates yet again. In one of the minutes, I think Ashima Goyal said the market pricing in the rate hikes is excessive. Now, the swap market was pricing in something like 6.75 peak repo rates. Would you say it is excessive?A: I won't like to comment on that — swap markets have their own momentum and their own factors. In fact, I would say expect the swap markets and the overall market to be guided by the Reserve Bank's statements and actions. And let me also say that I think over the last two years, especially during the extremely stressful times of the COVID pandemic, there was some sort of a compact between the RBI and the financial markets. I think there was convergence of thoughts on many aspects and that is how we have been able to reach where we are today, where recovery of economic activity has become steady and is gaining further traction. Q: Nevertheless, inflation is an issue. It’s likely that for three quarters, we are not going below 6 percent. One of the members of the Monetary Policy Council did speak about the need to get to positive real rates, or at least zero real rates. We are now deeply negative. Are you also thinking about the need to return to positive or at least zero real rates?A: Please give me a little time because inflation is the major area of concern today, a major area of interest for everybody in the country. There are two facts I would like to mention at the beginning. Number one, the interest rates in almost every country today are negative, except perhaps Russia and Brazil. The interest rates of any advanced economic are all in negative territory.The second thing is that with regard to inflation, the target for the advanced economies for example, is 2 percent. But USA is at 8.3 percent, United Kingdom is at 9 percent, the Euro area is more than 7 percent and if I remember, China is about 5 percent. I think except Japan and one other country, all of them are in excess of 7 percent. In India, our target is 4 percent. We have a tolerance band which goes up to 6 percent, and we are at 7.8 percent. There are analysts in the market who say that we have reached the peak, I won’t like to comment on that, because it will again depend on so many other factors, including the action which the central bank and the government are taking.Also read: Nikkei, Australian market tussle with inflation, rates concernLook at the inflation mandate target which has been given to RBI in the Reserve Bank of India Act. It is a dual target. It says to maintain price stability, keeping in mind the objective of growth, price stability is 4 percent, plus-minus 2 percent on either side. So, when we experienced the deepest contraction in our economy in the first quarter of 2020 when COVID set in, we were minus 24 percent and the economy that year was minus 6.6 percent. This year's final number will come on 31st, but we have a sense that the economy has revived, it has exceeded, however moderately, the pre-pandemic level and it has exceeded the 1920 levels.Private consumption has now entered into positive territory. Private investment is also showing signs of improvement. Therefore, our primary target at that time was to focus on growth and bring back inflation to 6 percent. Intermittently, during this period, inflation spiked to 6 percent and above, I think on one or two occasions it even touched 7 percent. But last year, it almost came down to 4 percent on multiple occasions. If I remember correctly, it was in January, then again around April and again in September and October, it came down to 4 percent. In fact, last year in August, we had stopped calling it ‘due to transitory factors,’ as supply-side factors remain ever dominant for the current inflation. We stopped calling it transitory because we had concluded that it is not going to be so transitory.Now, when we entered this calendar year, this question has been asked. I referred to it earlier, mentioning that in February our MPC projection of inflation was too optimistic. I will tell you why we did 4.5 percent. The momentum of inflation, month-to-month or month-on-month, from October onwards, was moderating. The food price inflation was moderating and it appeared that once the supply chain bottlenecks started easing with the easing of COVID, the supply side factors would also start getting resolved.Even in February, we had done our stress tests, we had done our scenario analysis and we found that even with a margin of error of 50 basis points, we will be at 5 percent. We had assumed oil prices, crude oil prices to be a little below $100 and that gave us inflation of around 5 percent. So we were fairly comfortable and the roadmap for the future was that inflation would moderate. But then the war started on February 24, and everything changed. So in April when we had our MPC, we took several decisive actions: We changed the sequence of our priority. We put inflation first, growth next. We again normalised our liquidity adjustment facility (LAF) corridor, we changed our stance saying that we are focusing on withdrawal of accommodation, and there was a rate action. The rate action was that we introduced the SDF, and against 3.35 reverse repo, the SDF was 3.75 and that was a 40 basis point increase.Also read: IMF’s Gita Gopinath says interest rates need to move up much more to bring down inflation durablyNow, this 40 basis point increase in the liquidity absorption rate resulted in the overnight call rates immediately going up by 40 basis points. So there was a rate action. I think this is a point which the market and everyone should take note of — that there was a rate action in the month of April, which I think many people seem to have lost out on.So this question about why the sudden meeting. Well, it was not sudden. In April, we did a rate action of 40 basis points, and the overnight rates went up by 40 basis points then. After the April print, several new developments took place. For example, the FAO and the World Bank came out with their food price index, and it appeared to become very clear that food price inflation is here to stay.What’s more important is that in my MPC statement (not in the minutes, which comes out after 15 days), I said the situation is fast-changing and dynamic, and our actions will be tailored accordingly. I think many of you read it. But I don't know why on May 4, when we announced the off-cycle meeting, you forgot about that particular bit in my statement.Q: You have defended, but you have not told me whether you want to come to positive real rates anytime soon?A: We will move towards that. How soon will depend on the evolving situation. It will not be correct on my part... In fact, it is not possible also to forecast how soon because the situation is so dynamic. Now, for example, the inflation metrics may undergo a change because of our action and the timely action which the government has taken.Q: You were speaking about the actions the central government has taken. Now, that also means a rise in fiscal deficit and possibly market borrowing. Do you think that the government will have to borrow more?A: Obviously, I cannot speak on behalf of the government, but having worked in the Finance Ministry for sufficiently long, let me say that there is no one-to-one correlation between increase in government expenditure under one head and the need for additional borrowing. These are all figures which keep moving throughout the year.As we move into the year — please remember that we are only in the month of May, only second month of the current financial year — in certain heads, the expenditure requirements go up and in certain heads the expenditure requirements or the absorption capacity can go down. The same thing can happen in revenue, it can show greater buoyancy at times. In fact, the revenue figures currently — or going by the recent experience the GST or the direct taxes — look very robust.Now, my sense is that the government remains committed. Again, I cannot really speak on behalf of the government, but my sense is that the government will maintain the fiscal deficit target given in the Budget. How they will do it, I cannot say. But the sense I have in the several discussions between the Reserve Bank and the government [is that] the government could be sort of committed to maintaining the fiscal deficit.Q: Even then the yields have gone up to 7.4 percent on the 10-year, and chances are that as the government programme picks up and credit offtake picks up, it can even go towards the 8 percent mark. You have done one CRR hike, you have been selling dollars and bonds. So, do you think there is any scope at all to help the government through open market purchases?A: You see RBI is the debt manager to the government and RBI will use all the instruments at its disposal to ensure an orderly evolution of the yield curve. This is something which I said earlier in October 2020. I had said the management of the yield curve is a public good, where both the market and the central bank have an important role and I mentioned earlier about the kind of compact that we had entered into.World over, the yields have gone up and it's due to a complexity of factors. I am not going into the details as yields have gone up everywhere. US yields, which are less than 1 percent, are today almost touching 3 percent. It had even exceeded 3 percent. Now, it is about 2.8 or 2.9 percent. As yields have gone up everywhere, naturally in our country also the yields have gone up and the RBI will use use various policy instruments.We have various policy instruments, like operation twist. The currency swap is another liquidity management tool which we introduced three years ago. Then there are several other tools which we will be using and we will evaluate the situation. We are just in the second month of the current year, we are very watchful, and I think this informal compact I have with the market will continue. We will communicate with the market constantly and I think the RBI remains committed.Q: But is it a worry at all that ...A: We will use various instruments from time to time depending on the requirement.Q: But the market is interested in OMO as an instrument that is predominantly market-moving?A: I don't want to bind myself… to OMO. We have all instruments on the table. We will decide which instrument will be used and where.Q: But overall, is there a worry about the twin deficits deteriorating? A: I have said that my sense is the government will maintain the fiscal deficit. As far as current account deficit, which is in our domain, we will be able to manage it very comfortably this year. India's external sector remains strong. The exports — I think for the 14th successive month — is more than $30 billion. The latest numbers were very high, it was $40 billion in March So, the export sector continues to be very strong.Imports have also picked up and increased imports is reflective of the strength of the underlying fundamentals of the economy in the sense that there is a demand pickup. Even at higher prices, the imports are still sustaining, which means that domestic demand is reviving. I hope I have made the position very clear. So domestic demand is reviving and the imports are going on despite high prices. The revival of domestic demand is a very positive trend.We have the IIP numbers of both services and manufacturing and they are in expansion territory. In fact, the April numbers were more than the previous numbers. The monsoon has already hit the Andaman islands and I think anytime soon it will hit Kerala and then slowly move. The monsoon is looking good. Agriculture is looking good. Food stocks, on which there is so much of discussion, look good. I think the rice stocks are four times the buffer and the wheat stocks, if I remember correctly, are about 1.8 times the buffer level. So India is comfortably placed.The domestic fundamentals of the economy are good and external sector remains strong. The FDI inflows are steady despite some moderation in the recent months. So given this kind of underlying fundamentals and the fact that our external sector is strong and our total external liabilities external debt is only about 20 or 21 percent I don't expect a very big jump in our current account deficit. We will know the number eventually at the end of the year. But we are comfortably placed to finance the current account deficit.Q: It looks like $20 billion is a given trade deficit per month, that will be $240 billion in a year. Every economist on the street is expecting a balance of payments deficit. Is the rupee a worry at all?A: There will be a current account deficit obviously. I don't think we will have that kind of balance of payment situation. The situation is constantly changing — exports are picking up, the underlying fundamentals of the week are very strong. You are right that the current account deficit in the last few months has touched $20 billion, but I think even if we proceed to the level which you are mentioning ($100-120 billion), we will be able to comfortably finance that.And as far as the worry around rupee, let me clarify one point — our stated position is to prevent excessive volatility, and we will continue to do that. We will obviously not allow a runaway kind of depreciation of the rupee at a rapid pace. The rupee will find its level, we have no specific target of exchange rate in our mind. I am not saying anything new. This is the RBI’s table. People can say anything, but I am telling you on behalf of the RBI that we have no specific level in our mind. The rupee is market determined, but we will prevent excessive volatility.Also read: Morals and money – Manmohan Singh advises Modi to NOT ignore the dollarWe will not allow a runaway depreciation of the rupee, the rupee will find its level. And with regard to concerns expressed by some sections that the reserves are depleting… Why do we build reserves? We build reserves to deal with situations of stress, as we are currently facing. Our reserves three years ago were less than $400 billion, then we touched $640 billion.Now, we are back a little below $600 billion. And this $40 billion, which has gone, which has depleted, it's not as if we have sold $40 billion to keep the rupee where it is. A good part of it is due to revaluation of reserves, because as the rupee depreciated, the dollar appreciated. So it is both RBI intervention and RBI’s revaluation of reserves and our intervention in the market again. I am not sharing a state secret, but our intervention in the market is multi-pronged and is aimed at minimising the actual outflow of dollars. Let me leave it at that.Q: Your dividend was at a 10-year low. The last I heard 30,000 was I think in Subbarao’s time. The government didn't resent it?A: When the dividend is high, you ask why it is so high. When it is low, you say why it is so low.Q: Usually the government would resent it?A: I will tell you, the dividend number is a function of the balance sheet. It is derived from the balance sheet, whatever is the surplus at the end of the year that gets transferred to the government as provided in the Act. So, I have no control over it, RBI has no control over it and it depends on where we are on March 31.Q: Just one word on this rupee depreciation and its value. Is China or the yuan also an important consideration when the Reserve Bank looks at the exchange rate?A: We look at all currencies. We look at the yuan, we look at all reserve currencies, we also look at the emerging market currencies and I think the rupee has done far better than many of the emerging market currencies. On certain days yes, it may be possible that the other currencies have done well. Also, another point I would like to mention is that on certain days, or for a couple of days, due to some one-off event somewhere, the rupee depreciates. But by the end of the day or by the next day, the rupee comes back to a level where it started. So, I would like to say that the rupee has remained quite stable [and] we will ensure stability in the exchange.Q: In the market we normally say God has acted, so the rupee has come back. They only mean RBI when they say God. The more important part is that, when you went to IMF, suddenly there was this May 2-4 meeting, and even other countries raised rates. So, was there something you got from IMF, World Bank meetings?A: No, it's not like that we had certain factors in our mind. Even at the time of the April policy, we had some discussions. Even before going to the IMF, we had some discussions and it is not as if we will do what other central banks are doing. But I think that gave us an opportunity to basically understand the assessment of the global inflation. There was a lot of sharing of thoughts across central banks, because on the sidelines of the IMF, we had our meeting of the central bank governors of the major economies, and that gave an opportunity of knowing their assessments of domestic inflation and the global inflation. So obviously, you get some inputs from there, but our policy is determined by our domestic factors.Q: I have not asked you anything about the banking sector. When you raise rates, all the banks are on external benchmarks. So, the rate hikes will pass very swiftly. Do you worry that there can be NPAs? A: The Currency and Finance Report was basically saying that this is an area which has to be watched, because it depends on, again, so many factors; how the salaries of people are coming, the EMIs and other payments. So, it was more of a kind of a signal. When the Currency and Finance Report was prepared, the number that was available at that time, the total retail GNPA, the NPA levels in the retail portfolio of all the banks put together at the aggregate level had exceeded 2 percent. But the provisional data we have for the subsequent period has come back to about 1.8 percent or a little below 2 percent. So, even at 2 percent it is not something one has to be very worried about.Also read: Banks can't take heart from improving recoveries as RBI warns of possible rise in bad loansThe idea is that this can become a problem and calls for greater watchfulness and greater focus on following up the collection. Also on the banking sector, as I said, 6.50 percent is the overall GNPA. The banks are fully sensitive to the need to monitor the NPA levels very closely. The collection efficiencies have improved in almost all the banks, and they are almost at 100 percent. Banks have raised a substantial amount of capital during the period of COVID. Going forward also, various banks have their capital raising programmes.You asked one more question on whether the rate hike will have a dampening effect on the credit offtake. Credit offtake depends on a multiplicity of factors. It depends on how well the economy is doing, how the private consumption, private demand is picking up. So it is a complex set of factors. And with the underlying fundamentals of the economy where they are, and with growth showing very clear signs of revival, IIP numbers and all that I mentioned — despite the COVID and the war — I think bank credit offtake should remain steady. According to the latest number that I have for May 6 or 7, bank credit growth is about 11 percent year-on-year which is more than double of last year. By more than double I mean last time it was about 5-6 percent and now we are at 11 percent.Q: The market will not forgive me if I don't ask you about the HDFC-HDFC Bank merger...A: Both HDFC Bank and their parent company the HDFC have given their proposal for amalgamation to the RBI. It is under examination in RBI. So, till the decision is taken and given out, it will not be correct on my part to comment on that. One more point, which I think I forgot to mention in the context of the government borrowing programme, is that we increased our HTM requirement to 23 percent, so it is not as if RBI has turned a blind eye to the borrowing. It is very much on the table. So HDFC and HDFC Bank is under examination and I think we should be able to reach a conclusion in the near future.Also read: Lack of communication on merger lead to fall in HDFC twin stocks, says HDFC chairman Deepak ParekhQ: Just the last word on crypto? It is kind of in-between everything and then we had this Coinbase CEO saying that RBI discouraged us from using the UPI. Where do you stand? A: I would not like to react to speculations by individuals. We have always been cautioning on crypto, and now see what has happened to the crypto market. Had we been regulating it and then the markets crashed, obviously people would be raising questions what happened to the regulation? This is something whose underlying is nothing. For a product whose underlying is nothing, the big question is how do you regulate it.Also read: Coinbase CEO says exited India crypto market in three days due to 'informal pressure from RBI' but will returnOn cryptos, our position remains very clear, it will seriously undermine the monetary and financial and the macroeconomic stability of India and we stick to that position. We have conveyed our position to the government and government will take a considered call and I think the statements coming out from government are more or less in sync with. They are also equally concerned.Governor, you have given me more time than I would have hoped for. Thank you very much indeed, for this many-sided conversation on the macro economy.