Good Day, Ladies and Gentlemen and Welcome to the RBI’s Fourth Bi-Monthly Monetary Policy Media Teleconference. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, you may signal the operator by pressing ‘*’ then ‘0’ on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Ms. Alpana Killawala. Thank you and over to you, ma'am.

Governor, how much of this policy is a continuation of previous policy? I ask because the word 'removal of liquidity deficit' in the action of the MPC is not there, it was there in the previous policy. So, do you persist with removal of liquidity deficit and maintaining neutral liquidity?

The other thing, 150 basis points to 200 basis points positive real rate was the policy sometime back, will that persist as well? Will you look at 4 per cent inflation by January 2018, as per second point?

On the real policy rate, I will turn to Michael. Let me talk about the 4 per cent. Please note that pending the amendment to the RBI Act and associated notifications, RBI indicated its resolve to contain inflation through self imposed targets and framework agreement with the government. Now, all those ad hoc measures are superseded by the legal amendment and the two associated legal notifications, in addition to the MPC.

So, the neutral rate as you know, and as we have put out a research on this, is the time varying concept, does not stay still at a point in time and changes with things like demographics or the potential output itself. And the world over the sense is that the neutral rate is going down and that is why you see many countries actually putting in place negative interest rates, that is where they see their neutral rates. So, as far as we are concerned, in continuation of what has been articulated before, if you look at the risk free rate, that is the treasury bill rate, it is 6.5% and if you look at inflation expectation which is best exemplified in the RBI's own projections of 5 per  cent, so you have a 1.5 per cent. But as I said, we need to take into account the global situation where the neutral rates are actually declining, so it could be around 1.25 per cent or thereabouts.

Can I now request both DG Vishwanathan and DG Mundra to speak about the areas related to them and which are partly reflected in Part B. Mr. Vishwanathan? Thank you.

No, I mentioned 2016 - 2017 and that Q4 projection is 5 per cent. So, if you deduct 5 per cent from 6.5 per cent which is the risk free rate today, you are getting 1.5 per cent. But as I said, globally there is a tendency of the real neutral rate to go down overtime and that is where it is today. So, I would discount 1.5 per cent by 25 basis points and say that 1.25 per cent is the real neutral.

Well, as I said that after the amendments to the legislation and the associated notifications, the Act and the consequent 4 per cent +/- 2per cent is what we have to endeavor for. In fact, if you read our March 2015 statement that also makes that very clear. What we have identified are some upside risks, but there are downside risks also. If you see that range when we talk about 4 and .5, it is very large. If I look at over the next seven, eight quarters, the government has introduced structural policies, reform policies which is of course done to address supply constraints. There is larger investment in railways and roads which will improve infrastructure, the ease of doing business, the proactive food management has played a crucial role in the past two years and will continue to play a crucial role in times to come. There is an improvement in pulses supply which has been the main contributor and there has been a sharp improvement in competitiveness ranking. So, while there are issues related to the upside risk, and we have always said that the direct impact of the (House Rent Allowance) HRA on the CPI will be looked through. So it is highly uncertain indirect effects which we will have to wait for in terms of both how the HRA is going to be implemented and then the consequences thereof. So, it is in that backdrop that risk has been identified, indeed there are some others also.

So, I think there are two parts in which the answer can be given. One, the transmission through the money markets has been swift and decisive and corporates are using those parts of the financial system more compared to vanilla bank credit. I agree that the transmission to bank lending and to bank borrowers has been less than any one of us would have liked and we are hoping that over the next quarter or two, or keeping in mind that the government has now also reduced the small savings rate, so the government's intention to bring that to the more market related has also been now amplified, that Marginal Cost of Funds based Lending Rate (MCLR) calculation itself will now throw up more transmission. One thing to distinguish is that the new lending, the transmission has been much more in terms of the rates coming down.