Against the backdrop of Standard & Poor’s downgrading India’s outlook to negative, Reserve Bank of India (RBI) Deputy Governor K C Chakrabarty on Thursday said the country’s financial system was strong and all risks to growth and the economy were only internal, in terms of productivity and efficiency.
“It is only an outlook change and what is coming in the rating is already in the know. The market has already discounted it,” he said, to a question on the impact of the rating downgrade on external borrowings, among other things.
Asked about RBI’s views on the state of the economy and fiscal conditions, he said it would be known when the central bank issued its financial stability report in the month of June. While RBI undertakes overall diagnosis of the country’s economic and financial parameters every six months, it is a long haul before combining all the reports and informing the Financial Stability and Development Council, he said. The report is then made public.
“As of now, our financial system is strong. If anything comes up in the course of the ongoing examination, then we will let everybody know in the month of June,” he said, while fielding incessant queries on the S&P action.
On the likelihood of any currency intervention by RBI in the wake of the lower credit rating, he said such intervention depended on market volatility. If there was one because of the rating downgrade, he said RBI would certainly act.
To another query, he said the cost of external borrowings might go up because of the downgrade. He said pressure was already on the government to improve the fiscal situation and the finance minister had indicated through the budget on what was being sought to be done. On different rating agencies giving the country different ratings, he said if someone saw 10 doctors, there was a likelihood that each would give a different opinion on the patient’s health.
On the inflation-growth trade-off, he said high growth needed low inflation; high inflation was inimical to growth.
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On financial inclusion
Earlier, addressing a seminar, Chakrabarty said financial inclusion was not charity but a business opportunity that no bank could afford to lose in the long term.
After RBI brought out a financial inclusion plan in 2010, banking connectivity had increased to 147,000 villages by March 2012 from 54,258 villages in 2010, he said. During the same period, 50 million basic banking accounts had been opened, taking the total number of such accounts to a little more than 100 million.
However, he said, the sector required at least 125,000 intermediate structures having a terminal link with a central business server, a passbook printer and a safe to keep the money, as as a link between the nearest brick and mortar branch and the business correspondent deployed in an area, to take the ongoing inclusion drive to a meaningful level.