D Subbarao has all along appeared to be more focused on taming inflation rather than supporting growth. On Friday the Reserve Bank of India (RBI) governor once again reiterated the risks to inflation, expressing concern on the current account deficit (CAD) and saying the vulnerability of the country’s external
sector was worse than it had been a year ago. Subbarao told FE’s Aparna Iyer and Shobhana Subramanian after the monetary policy announcement that it was difficult to assess how soon and how much monetary transmission could take place following the policy rate cut. Edited excerpts:
Your estimate of how much transmission is possible in FY14…
It is difficult to put a number or a time frame to it. Banks respond almost continuously over time and the transmission lag is up to two years. Banks have said that RBI must note that transmission takes place through base rate adjustment and also through spreads. Transmission is absolutely critical but there is a risk that if banks reduce deposit rates, people would opt for more of these informal schemes.
Will the RBI take comfort from the fact that transmission takes place through the debt market?
I think we should not ignore that. In fact, even in the meeting with bankers I was told that transmission will take place through the corporate bond market and that later on, the rate cut will be transmitted through the banking system. What I want to say is that I will not be unhappy if transmission takes place through these.
Are prudential safeguards for exposure to unsecured debt adequate? Is there a need to revisit the exposure norm of 15% to a single entity and 40% to a group?
Yes, the guidelines seem to be fine. We have stretched ourselves to allow 40% in order to finance infrastructure. I believe that stretching it further would not be advisable. But, at this point, I believe there is no need to cut it back.
The government seems to be keen to raise the ceiling for FII investment in debt, currently at $76 billion. Is the RBI worried about this?
I cannot really say whether I see room for further
relaxation. The limit has been relaxed quite substantially in the last few months. And the sub-limits have been collapsed. We had to this because we do have a large CAD.
But we still continue to believe that we need more stable flows and non-debt creating flows. I believe the