In line with market expectations, the Reserve Bank of India kept the repo rate unchanged at 7.75 per cent. However, it cut the statutory liquidity ratio to 21.5 per cent of deposits from 22 per cent in a bid to give more headroom to banks to lend. In a media interaction, Governor Raghuram Rajan explains the rationale for the status quo. Edited excerpts:
You have not given any guidance at all. How do you see the CPI (consumer price inflation) trajectory? With the old base itself if it is only 6 per cent, what would be the real rate that you would be comfortable with?
We are looking for developments on both aspects of the disinflationary process, which we would like to see it continue. On the fiscal front, we have a Budget coming up, so those are important developments that we will pay attention to.
I am not giving any number …These are more complicated. There are forces that are in play, including the lower oil prices and relatively stable exchange rate. Also, there has been some action on food management, this is the season when vegetable prices start going up and we want to see how that will play out. So, we haven’t had any significant data since January 15.
What kind of difference do you want to see between inflation and policy rates?
We think between 1.5 and 2 per cent is a reasonable real rate where we are in the business cycle. Different people have different views. Dr Rangarajan would like to see it closer to 3 (per cent), while some people would like to see it closer to one (per cent).
There has been no transmission of interest rates from the cut made earlier this year. Is a nudge required by the RBI to banks?
The RBI is not the owner and is not in any way responsible for the day-to-day running of banks. That’s a decision that the owners and managements have to take. So, we cannot nudge them. But we can say that despite a fall in long-term interest rates, substantial fall in treasury rates (over the last year and a half corporate bond rates have also come down substantially), bank lending rates have remained more or less flat.
Also remember, monetary policy works with long and variable lags, in India approximately three quarters.
So, a couple of banks have cut their base rates (Union Bank of India and United Bank of India). Some banks, I presume, are worried that if they cut their base rate that will apply to all borrowers and not just new ones.
Given how weak credit growth for the banks has been, though overall financing has been strong, as large corporations have gone out, at some point banks have to start lending to them again.
And banks will have to be more competitive, which means they will have to cut the rates. Now, we have given directions on how to calculate their base rate to make it more transparent. But I am hopeful that it’s a matter of time before banks judge that they should pass it (rate cut) on.
Many have been relatively quicker to cut their deposit rates but not so quick to cut lending rates. I presume some are hoping they can get the spread for a little more time to repair their balance sheets. Eventually, competition or ‘ spardha ’ is what matters.
Has there been excess appreciation in forex rates?
It’s too early to say that the exchange rate has played a big part in the export numbers. If you look at export volumes, they are still up for the non-jewellery part.
At present, it would be wrong to say that we are grossly uncompetitive… We have to be careful in this world, people keep looking at the exchange rate vis-à-vis the dollar, (against which) our currency is weak but we have strengthened virtually against every other currency.
It is something that we have to be watchful for. We do not intervene to try and target a particular level for the exchange rate, where we do intervene is to stem volatility and we have intervened in both directions in recent months and weeks.
Now, we are perfectly comfortable with where the rupee is but we have to be perfectly comfortable going forward with massive amounts of quantitative easing that are going on in the rest of the world that there are possible dangers of us becoming uncompetitive on that dimension.
Will inter-meeting moves not happen again?
I don’t want to keep emphasising, but we will try as much as possible to stick to meetings. One reason we did it last time is because we had said that we wouldn’t wait a moment longer than when the data suggested that we could keep cutting rates. Given that public statement, there was no data awaited that we would cut rates.
Is India in a better position than last year to cope with the quantitative easing in global markets?
We have made important strides on at least three out of four macro variables — growth, inflation, current account deficit and fiscal deficit.
The fourth element is fiscal deficit; this is where the Budget will be an important factor in establishing the continued confidence in our decision.
A secondary aspect helping us is our build-up of reserves, which are substantially higher … therefore, we are in a much better position.
We will not be immune from volatility but after the first wave of volatility when market participants stop to think, we will be in a much better position.