Reserve Bank of India Governor Raghuram Rajan believes that the current policy rates are appropriate given the economic scenario. He said that he will adopt a wait-and-watch approach to tide over the current bout of uncertainty — political or climatic.

On the issue of foreign banks converting their Indian operations into subsidiaries of their parent banks, Rajan pointed out that the RBI might wait for some more time before nudging the foreign banks to convert. In his post policy media interaction, Rajan spoke candidly about a host of issues. Edited excerpts:

You said that if inflation goes along the guided path, there will be no rate hike in future? Will climate projections like El Nino have a bearing on future decisions?

It is not a given that El Nino will happen. Conditional on El Nino happening, it is not a given that food production will plummet. If this happens, then also it is not a given that inflation across the board will be high. It depends on which commodities are particularly affected.

So, there are a lot of uncertainties in this trail of thought. Therefore, we cannot precisely anticipate what will happen. If food prices do increase, then there is this question of whether it is a short-term increase, such as the vegetable price increase we saw in December (that we decided to look through), or a more permanent increase, which will cause second round effect in wages and so on. So we will have take a call based on the hypothetical event happening and if there is a long term effect on inflation.

Given that inflation was low in recent readings, do you think there was a scope for rate cut?

If we had second thoughts about the rates, we would have moved the rates. We believe that the rate is appropriately set right now given our anticipation of events over the next few months. The core consumer price inflation is sticky, but we have seen some sort of fall in elements we were worried about. For example, in services inflation, there has been some reduction over time. So, we will give this dis-inflationary process some-more time. We are not overly moved by fall in the vegetable price inflation but we are watching the dis-inflation that is happening in services.

We could get a strong Budget, which will put the country on the fiscal consolidation process. Oil prices are relatively calm. If geo-political risks increase, then oil prices will increase and vice versa. Let us wait and see. Right now, the policy is appropriately set.

If post elections, there is no stable government what are the challenges for policy?

The markets now are anticipating a stable government and rapid policy actions. To the extent that markets are disappointed (with unstable government) it will reflect on stock markets, perhaps on bond markets and perhaps on exchange markets. We have to be prepared for some turmoil.

At the same time, I believe that even if the Government is not a stable one but if it shows the appropriate concerns about the economy, about the fisc and so on, then I think that after the initial bout of turmoil there might be a reassessment that may be more positive.

The BJP spokesperson said that there is no need for new bank licences, so do you see some problem going ahead?

Not really. I think one should respect all the opinions that are expressed. This is a process that Finance Minister Pranab Mukherjee initiated in 2011 and then the RBI took it up on itself subsequently. All regulatory processes must come to an end, they cannot go on indefinitely.

The issuing of bank licences is not a political process, it is an economic and regulatory process and, therefore, must be seen as being distant and different. While different political parties might have views, we have to undertake what we have to undertake.

What is holding back foreign banks in India from becoming subsidiaries of their parent bank?

Some of them do not really see a big benefit from increasing their branches. Some of them worry about the greater priority sector lending obligations that come with that. Going forward, we will have to take a view at some point.

At some point, this becomes a regulatory issue. To ensure banking sector stability, we need our large entities to be fully responsive to regulations here. Therefore, at some point if the carrot does not work, we may have to push a little harder as some other jurisdictions across the world have done.

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