Money & Banking

We believe the government will maintain the fiscal deficit: Das

Our BureauMumbai, October 4 Mumbai | Updated on October 04, 2019

With the slowdown in domestic economic activity, which started in 2018-19 extending into the first half of 2019-20, the Reserve Bank of India, on Friday, cut the repo rate for the fifth time on the trot. Benign retail inflation helped the central bank cut the rate from 5.40 per cent to 5.15 per cent. In a media interaction after the release of the six-member Monetary Policy Committee’s resolution, Governor Shaktikanta Das said the RBI will continue to remain in an accommodative mode “as long as the growth momentum remains as it is and till the growth is revived”. Excerpts:

Was the possibility of an upward revision in fiscal deficit target taken into account when the rate was cut?

At this point of time it may be noted that the government has made a statement that they will adhere to the fiscal deficit of the current year. So, we have no reason, therefore, to doubt the commitment of the government to maintain the fiscal deficit number as given in the Budget. And this I would say as the government has several sources of revenue. So, whatever shortfall is expected because of the announcement of the corporate tax rate cuts, the government has the option of making it up through other sources. But since the government has come out with a statement, and going by its past track record, we have no reason to doubt the statement. And we go by the statement of the government that they will maintain the fiscal deficit.

The MPC decided to continue the accommodative policy stance for as long as possible, but is there no lower bound for the policy rate?

We have not said anything about the lower bound. What we want to say is that we are giving some kind of forward guidance that as long as the growth momentum remains as it is and till the growth is revived, the RBI will continue to remain in an accommodative mode. From this one cannot infer what the minimum repo rate will be and when the RBI will take a pause. It is not possible to comment on that at this particular point of time.

As growth revival is not happening, the market was expecting a 40 bps cut, but the RBI went it for a 25 bps cut. Will this help revive growth?

We have now cut the policy rate by 135 bps (cumulative from February till October 2019). So, one has to also see its impact. And it does take time for the impact to filter into the real economy. So, therefore, we will have to see the impact of all these policy rate cuts. We will have to also see how the fiscal measures, which the government has taken over the last few months, will impact the real economy. And at this point of time 25 bps was, therefore, the call which the MPC took.

There have been concerns recently about the stability of the co-operative banking system following PMC Bank being put under administrator. What is RBI doing to allay these concerns?

The Indian banking sector remains sound and stable and there is no reason for any unnecessary panic. Sometimes unnecessary rumours can create a panic situation. So, we appeal to the members of the public and all depositors not to believe in such rumours.

As soon as this issue [PMC Bank] came to our notice, the RBI acted very swiftly, very promptly. It came to our notice just a few days before we appointed the administrator on September 23. We are going to have an advisory committee; and we have reviewed the liquidity position (based on this we have enhanced the withdrawal limit first from ₹1,000 to ₹10,000 per depositor and to ₹25,000 on Thursday). A number of steps have been taken and the RBI has acted very swiftly. Let me say that one incident should not be used, we feel, to generalise about the health of the co-operative banking sector. We are looking into all aspects of this bank.

Where PCA is appropriate, the RBI will use the framework. Recently, we placed a private sector bank on PCA. This ensures that banks are put back on the rails.

What about the several failures in the cooperative banking system? Will the RBI tighten the inspection mechanism so that scams don’t go undetected?

The RBI would not allow a co-operative bank to collapse. Co-operative banks develop their own problem because of so many other factors. The discussion with the government with regard to the regulatory provisions of co-operative banks, which, as you know, are different from the other scheduled commercial banks, is an ongoing process.

So far as supervision is concerned, we have already announced formation of a separate department for supervision and are building up a separate cadre of officers for supervision. So, the department has been formed, and it is work in progress. So, therefore, those steps have been taken. And with regard to fixing of responsibility, I have mentioned that all aspects of this PMC Bank issue is being looked into. And at this point of time I will not be able to go into further details.

The PMC Bank debacle has triggered fear among depositors of cooperative banks. Does it warrant a change in how these banks are regulated?

Every such incident is an experience. Based on this, we will take a fresh look at the regulatory framework, and if any changes are required, we will take it up with the government.

You have been monitoring the top 50 NBFCs for the last nine months. What is the probability of any of them defaulting?

I have said it in the past that it is our endeavour to ensure that we do not encounter default of any large systemically important NBFC. With that objective, we are monitoring them and wherever required we call the management of those NBFCs and have a dialogue with them on how to resolve the issues. In some cases, banks are also sign ICA to restructure the loan.

Published on October 04, 2019

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