SLR cut not to make loans cheaper today, but to give banks balance-sheet flexibility: Rahhuram Rajan

Aug 06 2014, 01:48 IST
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SummaryGrowth will be most benefited if we disinflate the economy. And we don’t have to fight this fight again. Let’s fight the anti-inflation fight once and let’s win and that will create the best conditions for sustainable growth...

The RBI on Tuesday cut the SLR by

50 bps to 22%. In a media interaction, governor Raghuram Rajan said this would not necessarily make loans cheaper, but was intended to give banks some flexibility when credit picked up. Excerpts:

How will the SLR cut help banks?

If the government’s finances are improving and it is on the fiscal consolidation path, we can afford to liberate more access to financing and make it possible for both the private sector and the public sector firms to get access to that. They may not need it right now, but we are hopeful that, as the economy picks up and the credit growth gets stronger, banks would be able to use that space to lend to the productive sectors of the economy.

The best time to effect these cuts is when credit demand is not so strong that the reductions suddenly convert into a substantial increase in demand and a substantial shift away from government bonds. The SLR cut was not intended to make loans cheaper today, rather it was done to give banks more flexibility in their balance sheets going forward as credit growth picks up.

Could you add some colour to your liquidity management framework?

We have looked at the call money rate oscillations and are trying to keep the rate closer to 8%. Some of those oscillations are because of substantial and unanticipated variations in government balances and we have tried to work with that, but it creates a certain amount of volatility. As you know, there are increases in balances before tax dates and some of them you can anticipate by the size. What we are looking at is the possibility of doing more frequent term repos and of shortening the maturity of term repos and also, perhaps, thinking of the timing of the auctions during the day so as to manage volatility. To do these in a reasonable fashion, we are doing an analysis that is necessary. Hopefully, within a very short period, we will come out with the necessary changes so as to see if we can smoothen the changes.

What is the interest rate trajectory that the RBI is looking at?

I don't think our stance has moved from where we were last time and I think we see the short-term risks more balanced than last time. However, there is the issue of the monsoons where we have to wait and

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