Close on the heels of the third quarter review of the monetary policy last week, the RBI Deputy Governor, Dr Subir Gokarn, answered a couple of questions of immediate relevance while also addressing some issues concerning medium-term monetary policy. Excerpts:
Banks are already facing the pressure of rising non-performing assets (NPAs). Will the RBI's focus on inclusive banking not lead to more NPAs?
The rise in NPAs is partly due to macro-economic factors — growth momentum easing — and partly due to sector specific concerns. Inclusion is a long-term development strategy. Any attempt to increase the number of customers/borrowers in the system is bound to bring some NPA risk. But I don't think that undermines the larger objective of our strategy. We are a severely under-banked economy in terms of people who have functional access to the financial system. Unless you address that by meaningfully bringing them into the banking net — not merely by opening deposit accounts, but by giving them access to a wider range of financial services, the long-term objectives will be undermined. NPA is a short-term, cyclical and sector-specific problem. We don't want to get into a situation where the long-term objective is compromised by an unsustainable build-up of NPAs in the short-term. We are conscious of the risk. But this can be managed as a separate agenda.
The next Five-Year Plan envisages a $1-trillion expenditure on infrastructure which is obviously long-gestation in pay-offs. In the medium term, with that kind of money floating around, won't you have to maintain a hawkish policy stance to minimise the damage to money supply?
The figure ($1trillion) is an aspirational figure, an objective. We can't look at policy stance in terms of specific avenues or channels of expenditure. It is aggregates that matter. To the extent that the money is spent on infrastructure development, it will go towards addressing supply bottlenecks faced by the economy and does have a long-term effect on inflation management. We should not confuse the short-term objective of inflation management with the long-term objective of fundamentally addressing supply bottlenecks — whether in transport, power, water or food. We need to spend on these issues, but we need to see where else we can compress expenditure. In that context we have been emphatic on fiscal consolidation, which is to reduce subsidies and expenses contributing to consumption.
If the responsibility for public debt management of the government (currently handled by the RBI) is given to another agency, will the RBI be able to continue these buybacks of securities (open market operations)?
The line is still evolving. But even in a situation where issuance of debt is taken on by another agency, the day-to-day management of liquidity has to be done by the central bank. That is logical. It is the key to the functioning of a financial system. That role cannot be removed. What can be done outside is the portfolio management aspect or the investment banking part — matters relating to the duration of securities, yields, the timing of primary issuances etc.
The RBI was kept away from primary auctions of G-Secs on the grounds that this would lead to monetisation of the fiscal deficit. But aren't buybacks (OMOs — open market operations) doing exactly that in the secondary market?
The trigger for doing the OMOs was liquidity pressure. The daily borrowings were somewhere close to 3 per cent of net demand and time liabilities while our comfort zone is closer to one per cent. We are concerned and we have to see whether this is persistent or transient. The fact that the OMOs helped soften the g-sec yields is a reflection of how banks are allocating their portfolios. But our objective was not to support or soften the yields. So, hypothetically, if for instance, yields were high, but the liquidity situation was comfortable, then we may not have done OMOs.