‘RBI’s job is to build confidence, not play cheerleader’

The RBI on Tuesday went for a front-loaded policy (repo) rate cut of 25 basis points following low domestic capacity utilisation, mixed indications of economic recovery and subdued investments in credit growth. The central bank, upped its inflation projection for January 2016 to 6 per cent from 5.8 per cent projected in April. RBI Governor Raghuram Rajan underscored that the central bank is not a cheerleader for markets and will take rate action only when the three risks to inflation, still clouding the picture, get clearer. Speaking at the post-monetary policy press conference, Rajan said the RBI is waiting for more certainty on both monsoon outturn as well as effects of government responses in case of weak monsoon. Excerpts from the media interaction:

With inflation target revised upwards, further easing seems low. Is it time some of that burden is shared by the government to prop up growth?

I don’t think the premise is right that the government has been putting the burden on RBI. The Centre has been acting on its own to try and reduce bottlenecks, create new pathways for growth. So, I wouldn’t agree with that part. I think we both play together.

As for the first part of the question, we have done what we think is appropriate, given the data. We have always said we are data-contingent. There are possibilities if the monsoon turns out much better than forecast… there might be more room that emerges or if the actions by the government are such, as to contain the possible inflationary effects.

It’s believed the RBI is not giving any early warning signals to the banking system to help fight asset quality issues…

Bankers fully know about the asset quality issues. They have been sitting on them for a number of years. So, they have to deal with them. It is not the RBI telling them. What we want is a quick clean-up of balance sheets and restructuring of situations to put assets on track.

Nobody gains when the asset is lying without further progress, without new funding to get it restarted, or without fixing all the problems that exist. The government has been taking actions to fix some problems. Banks have to take actions to fix other problems.

Not recognising the problem is the worst possible action in these situations. What we are pushing at this point is, to also advise further capital so that the banks can fully recognise the problems and make provisions accordingly. In that sense, I think, problems are known, they have to be dealt with. Often the best way to deal with them is to deal with them now.

In the last six months you have cut the repo rate by 75 bps, but banks have not cut lending rates by more than 25 bps?

You can see the markets. If you look at the commercial paper and certificate of deposits markets, you can see the effects of rate cuts. If I look at bank FDs (fixed deposits), which I invest in because that is the only thing I can invest in, the rate has come down from 9 per cent to 8 per cent, a 100 basis points cut in FD rates. So, over time this has to be passed through to the lending side.

Is the RBI pleasing the Government with the token 25 basis points cut?

There’s a no win here. If I cut rates, you say I want to please the government. And if I don’t cut interest rates, you say I want to fight the government. Seriously, there is an idea that we want high interest rates because our primary objective is to look strong and firm.

But there is no point in looking so, if we kill the economy in the process. Given our mandate, we want to keep inflation under control. We also don’t think interest rates are the only thing that matters. There are many other factors. All other entities involved in generating growth have to contribute including banks, industrialists and the government. We do as much part as we can.

We could have waited but that would probably have been a conservative strategy in such an environment. We are moving forward but we are not going to be reckless. We have to have data for more room (for rate cuts). We are therefore contingent on the data. We use the available room when we have.

Would a booster-dose cut have been more effective?

The RBI is not a cheerleader. There are other people in the economy who can play the role of a cheerleader.

Our job is to give people confidence in the value of the rupee, in prospects of inflation and having established that confidence, create longer-term framework to take good decisions. Every time an exporter comes to me and says stability has been valuable to make decisions, I’m reminded that these are our main roles, not giving booster shots or playing cheerleaders.

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