The Reserve Bank of India on Tuesday disappointed many including the finance ministry by leaving the repo rate unchanged and cutting the CRR by 25 basis points. Governor D Subbarao told FE?s Aparna Iyer and Shobhana Subramanian there had been no pressure from the government to cut rates, saying the only way to improve investment sentiment was by taming inflation. Subbarao also said the RBI was looking for amendments to the Banking Regulations Act before it issued new bank licences.
What is the RBI?s position on bank licences?
We need the amendment to the Banking Regulation Act to give new entrants licences ? whether corporates or NBFCs ? and that is where it stands. There have been some media reports about whether something can be done to give the RBI powers, even before the amendments are made, but we are yet to receive any formal communication about that. We want to be able to supersede the board, authorise the acquisition of shares beyond 5% and for consolidated supervision.
Isn?t boosting the sentiment through a rate cut important to encourage investment?
The way the Reserve Bank manages sentiment is through inflation expectations and through a stable inflation regime. That also adds to improved sentiment and that is our stance now, so that investors can make informed decisions.
Have we not yet reached a point where growth is a more serious concern than inflation?
Well, growth is a concern. Our projected growth rate is 5.8%, potential growth rate is around 7.0% while inflation at 7.5% is a concern. We have one instrument, the interest rate, which we have to use to constrain demand and support growth, so we have to calibrate it carefully. So, we thought it is not time enough for signalling a softening of the inflation stance.
Since there is excess SLR in the system, isn?t the RBI accommodating public spending rather than private investment through a CRR cut?
To interpret our liquidity management as supporting the government borrowing and not supporting credit demand for private sector would be inaccurate. To the extent that there is demand from the private sector, banks will determine how to manage that.
The finance minister has commented that the government will have to walk alone on the growth path. Is there discord between the RBI and the ministry?
I think both the government and the Reserve Bank share concerns both about growth and inflation. We are as much concerned about growth as about inflation. The government is an important stakeholder in the central bank?s policy. The FM communicates with us both in private and public and we have great regard for what he says.
I believe we are pursuing policy that would together raise the growth rate and bring down inflation. I cannot interpret the FM?s statements for you but I can only say there is no disconnect between the RBI and the government.
How serious is the unhedged corporate exposure situation?
That was an issue we raised in the policy document that banks must have a board-approved policy for hedging exposures. Some of the banks said that because the rupee is volatile, corporates were not able to take a position at that time. There were some questions about cancelling and rebooking of contracts.
There is concern given the current balance of payments and external situation. And four years ago, we saw that corporates were giving incorrect statements. And corporates said banks had misled them. We don’t want that to happen given the vulnerable situation now.
You have indicated policy easing in January. What inflection point for inflation are you looking at and when?
We have inflation projections for the next few months until March and indeed into 2013-14, but these, by their very nature, are an approximation. So, I cannot precisely say that inflation will be at this level and when the inflection point will be ? it could be beyond January. If we see that inflation is likely to come down even in the January-March quarter, we might take some action during our January review, but we really cannot say any thing beyond that.
Economists say that inflation will be well above 8%. What level is the RBI seeing it and what level is it going to be peaking off?
It could go beyond 8% and as I said, it is difficult to put a specific time frame to that. It could happen even after January. But we expect that because of the base effect and because of a number of other constraints, inflation will come down thereafter. We will not decide our policy trajectory only on inflation but growth as well and other indicators. Given that inflation is going to remain relatively high, the scope for policy action is going to be limited. But don’t be guided only by the inflation number.
