 "It's premature to take a strong view on the new GDP numbers: Raghuram Rajan")
Reason for not cutting interest rate
Given that there was no development on the inflation or the fiscal front since January 15, we have maintained status quo. However, we have taken an action in a number of other directions. Many of these are intended to further the growth process and some to enhance the stability in the system. In terms of guidance going forward, it remains same when we cut rates last time.
Inflation guidance
We are looking for development in both the disinflationary process, we would like to see it continue and of course on the fiscal front, we have the Budget coming up. Those are important developments that we will pay attention to. We would like to see the forces that are in place, including the transmission of lower oil prices. Our hope is that these things will stay low in the coming years as these lower prices feed into prices more generally that will help the disinflationary process. Also, we had a relatively stable exchange rate so far. Some action on food management at a time when vegetable prices start picking up – we want to see how these things play out. We need more data than we had on January 15. Until we get more data, we are on pause.
Range for risk-free policy rate
We see the reasonable rate adjusted for real inflation at 1.5 to 2 per cent, given where we are on the business cycle. We want the real risk free policy rate at 1.5-2 per cent.
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On the new GDP series
We do need to spend more time in understanding the new numbers. We will be watching the February 9 releases with great care and will delve into what we see there. At this point, it is premature to take a strong view on the new GDP (gross domestic product) numbers. Most of the data that we have seen for 2013-14, except inflation which was very strong, there was slack in the economy. The chief economic advisor was pointing to the fact that non-oil imports were coming down substantially. Other factors, like auto production, was coming down during the period. So, we find it hard to see the economy as rollicking in 2013-14. However, we must understand better why those numbers kick out.
Monetary transmission
The RBI is not the owner, not anyway involved in the day-to-day running of banks. That is a call that owners and management have to take. We cannot nudge them. We can only comment on the fact that, despite a substantial fall in long-term interest rate, treasury rates have come down by a significant amount, and corporate bond rates have also come down substantially, but bank lending rates have remained more or less flat over this period. You may have seen some movement on new rates made by banks but in general, base rates have not changed. Of course, when you talk to banks they are very happy that we have cut rates. I presume some are hoping that they can get the spread for a little more time to repair their balance sheets. Eventually competition is what matters.
Exchange rate
We do not intervene to try and target a particular level for the exchange rate. Where we do intervene is to reduce volatility and we have intervened in both directions in the recent months and weeks. So, we both buy and sell. So, it is not in any way an attempt to go one-directional.Now, I think we are perfectly comfortable with where the rupee is, but it is a risk that we have to keep in mind going forward with the massive amounts of quantitative easing going on in the rest of the world that there are possible dangers of us becoming uncompetitive on that dimension.
Fiscal deficit: quality or quantity?
I think both. I think the finance minister as well as all the ministry officials have reiterated their desire to stick to the budgetary target for this year but also there is a lot of anticipation about the fiscal path over the next few years. It's not that we are locked to a specific number or specific path.
Extending regulatory forbearance of restructured accounts
I have said repeatedly that it is important that we clean up bank balance sheets, that we show what the balance sheets actually contain. That will enhance confidence in banks' balance sheets and enable banks to raise the much needed fresh capital. In order to build confidence in bank balance sheets we have to come to an end to forbearance, we have to put banks on the right track.
Long term investment in bonds
We do want to manage the country's balance sheet to make sure that we have bullet proof balance sheet when the inevitable interest rate rises come. We have taken two actions in that regard. One is recognising that we would not like to be seen as against foreign investors and given that we want to expand limits on a regular basis.
Given the interest in India today if we just expand the FPI limit in government securities by let’s say $ 5 or $ 10 billion it may just take a couple of week sand we may still get people wanting us to open more. We thought a more streamlined way of doing it would be to allow reinvestment of interest which is a more regular feature and which will allow some room for our patient investors who are staying with us and have taken the coupon to reinvest their coupons. That was the reason for government securities. We have seen a considerable amount of investments at the short-end of corporate securities. When we limited reinvestment in government securities below three years, we did not do the same thing for corporates because we wanted to develop a corporate bond market also.
We would like to nudge people into the longer-end. When you reinvest, you reinvest in three years and above securities.