As was widely expected, the Reserve Bank of India, on Tuesday, kept the policy rates unchanged. The RBI held the repo rate (the interest rate at which it provides short-term liquidity to banks) rock steady at 8 per cent. In its fourth bi-monthly policy review, the central bank said there are risks from food price shocks as the full effects of the monsoon’s passage unfold, and from geo-political developments that could materialise rapidly. In a free-wheeling interaction with the media, RBI Governor Raghuram Rajan unravelled the monetary policy.
How do you plan to reach the 4 per cent retail inflation target as mentioned in the Urijit Patel committee report?
As of now there is no consensus about what the ultimate target will be. My sense is over the course of the year, as the Finance Minister announced in the Budget, we will develop the understanding with the government on what the desired objectives of monetary policy are beyond the medium term, beyond January 2016. The structure of the monetary policy committee and the monetary policy framework all those things will have to be put in a framework. So, as the Finance Minister announced in the Budget speech, we will use this year to get more clarity on that. And then the government also has to indicate how it wants to take it forward on whether it will be an Act, in the form of an RBI Act or a government statement.
As of now our main focus is on reaching the 6 per cent retail inflation target by January 2016. Let us see how these discussions evolve with the government.
If the US Fed increases the rate, will it put pressure on the RBI to increase rates in the future?
The increasing US rates will certainly put pressure on capital flows. My hope is that after the initial volatility, which may come in anticipation of the rise rather than the actual event of the rise, financial markets will become more discriminating between economies with a fairly good macro economic prospect and countries where the macroeconomic prospects are uncertain. Political prospects also matter and as I repeatedly say the strong mandate given by the election and the strong government that has emerged as a result is a positive for India and the rating agencies have also recognised that. Our policy stance will be determined by the evolution of inflation rather than as much by outside forces.
How many more quarters for credit growth to pick up?
You are asking me to look into the future. Credit depends on investment. Investment depends on that, on that nebulous, hard to fathom thing called animal spirits. Now, we thought we had fair amount of animal spirits with the new government coming in. Now that has to translate into action by the Corporations. Some bankers tell me they are seeing glimmers of action on the smaller items – the brownfield investments. But it is not anything tangible. We need to build this recovery on tangible, strong investment across the board. So, we are waiting for that. I don’t think it has happened yet.
When will the RBI start easing the policy?
There are two points here. One is that how much are interest rates a key issue in preventing growth at this point. And I would say they are not the most important factor. But they are not irrelevant as a factor because after all the reason why we keep interest rate high is to curtail demand so that demand comes more in line with supply. So, I don’t think they are the most important factor.
And second, there is no getting away from the fact that there is a general consensus — we want to bring down inflation. I have one tool to do that — which is interest rate.
What steps are the RBI taking to address the issue of wilful defaulters?
The Gujarat High Court said you can’t, sort of, involve every director as a wilful defaulter. Some of these people may be innocent bystanders. We are not curtailing the right to do business but we are curtailing the right to steal from banks. We respect the court’s judgment. As I recollect, the Gujarat High Court’s legitimate concerns were whether we were, sort of, bringing innocent bystanders — directors of companies who are not involved directly in the wilful default — into the process. And what we have subsequently done – looked at the role of independent and nominee directors — to see whether we can sort of circumscribe the situation in which they would be labelled wilful defaulters. And the idea is if you can’t prove that they were either involved or were totally negligent and didn’t follow the basic duties of a director as prescribed by the Companies Act then there should be some liability. The reason why you are earning board fees as a director is you are supposed to exercise some corporate governance.
Interest rate is a blunt tool. Why not cut the policy rates?
Interest rate is a blunt tool but it is also the only tool. We have been pragmatic and the medicine seems to be working. The problem is before the patient has run the full course of the medicine, do you want to take him off the medicine and say let us take a chance. That is always the danger in Indian policy that we have to have the discipline to stay the course.
What is the status of banks’ loan exposure to coal mines that have been de-allocated and allied industries?
The government will be auctioning off some of these coal blocks again. There will be some inflow for the government. Then there is also the question of assets that have been created on the ground. All those things have to be taken into account. I think the government will take a view on how that plays out. Then the different parties what they get of the proceeds; we will have to see how that also plays out. My sense is that the government will want to treat the banks fairly in this process. Once we know how that is playing out, we will have a better sense of what the losses are and what the delays may be. It is too early to estimate what the consequences are.
In a time of distress, the issue is not whether you have to recognise the losses or not. That is a secondary issue. The main issue is making sure that the asset becomes productive again because unless it becomes productive again that issue will keep coming back. You get some forbearance in six months. Six months later you come back again and say it is not working.