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Reserve Bank of India (RBI) Governor Raghuram Rajan says the government’s target of reducing the current account deficit (CAD) to $70 billion or 3.5 per cent of the gross domestic product is “eminently reachable”.
“Some independent analysts were saying it would be even better,” Rajan said in an interview to business channels.
He said the general sense was that the CAD was not an issue now and, barring exceptional circumstances like a dramatic price rise in crude oil, was going to be under control. The governor’s confidence emanates from a drastic reduction in gold imports and a rise in merchandise exports.
“A narrowing fiscal deficit is also something that international investors are looking at. One way to narrow the deficit would be a jump in diesel prices. if that’s not on the table, a sequential increase in diesel prices at a rate that makes us close to market price in the near future is important,” he added.
Rajan said a cushion on the fiscal side was important to avoid going back to the uncertainty prevailing in mid to late August.
On GDP growth, Rajan told the CNBC-TV18 channel he believed that GDP was hostage to an ephemeral thing called sentiment. He was pleased that some results had emerged on that front in terms of lower outward foreign direct investment and higher inward FDI. “So, the net FDI remains the same as the previous year,” he added.
Rajan said there was growth potential in the economy. “There is also the output gap. Output gap is how strong the economy is, related to how much it can produce; that’s a stock variable. I think the output gap is strongly negative now. So, there are dis-inflationary processes underway as a result. We have to wait and see. This is data dependent. This is not automatic, especially if there are one-time effects like vegetable prices, etc. Wherever the state of inflation is, interest rates have to be significantly above that.”
On Monday’s reduction in the Marginal Standing Facility rate, Rajan said: “I feel the interest rates we had in place as a result of the exceptional liquidity measures were a little high, given the growth and the inflationary situation in the country. We needed to get out of these at a measured pace, as we saw stability in the currency being restored. Post monetary policy, there was a bit of volatility in the currency but partly as a result of stabilising external conditions in the internal economy, we saw the currency stabilise.”
The governor said the government certainly had a fiscal consolidation path. “If you look at overall government spending, we are not an outlier as far as emerging markets go,” he said.
Asked whether it was time we buried the wholesale price index (WPI), Rajan said it could not be done till RBI was in a position to focus on only one index. “We have to take information that is embedded in multiple numbers of inflation. WPI tells us something about the price of traded, manufactured goods. CPI (consumer price index) tells us about services. So, each gives some information. The ideal situation is with both measures of inflation contained.”
On whether he was planning to make the seven-day or 14-day repo permanent, Rajan said this was meant to be a market development measure and RBI had to observe the process. “We will roll it out and work with it until we get some term money rate out there, of which private term money rates can benchmark and we create a stronger market,” he added.
On the government’s plan to infuse capital to bring down lending rates during the festive season, the governor said RBI was comfortable with that, as better capitalised banks were in everybody’s interest. In the process, some of these banks that have excess capital will be able to borrow and will have more ability to lend to productive sectors of the economy.
On new bank licences, Rajan did not comment on his earlier discomfort about allowing corporate houses to set up a bank but said RBI had no desire to change the rules of the game mid-way. However, he said, the central bank needed better “supervision bandwidth”.
“We have a committee looking into it. We have small banks, cooperatives and we only have partial jurisdiction over them. We have to find a way that our regulation can actually bite and that we can resolve small entities. Large banks don’t fail but small banks fail all the time. That’s the comfort level, that you can fail a small bank if it does badly and you don’t have to rescue it. But small banks also serve a purpose, in that they do lend to small businesses and local areas.”
“Some independent analysts were saying it would be even better,” Rajan said in an interview to business channels.
He said the general sense was that the CAD was not an issue now and, barring exceptional circumstances like a dramatic price rise in crude oil, was going to be under control. The governor’s confidence emanates from a drastic reduction in gold imports and a rise in merchandise exports.
“A narrowing fiscal deficit is also something that international investors are looking at. One way to narrow the deficit would be a jump in diesel prices. if that’s not on the table, a sequential increase in diesel prices at a rate that makes us close to market price in the near future is important,” he added.
Rajan said a cushion on the fiscal side was important to avoid going back to the uncertainty prevailing in mid to late August.
On GDP growth, Rajan told the CNBC-TV18 channel he believed that GDP was hostage to an ephemeral thing called sentiment. He was pleased that some results had emerged on that front in terms of lower outward foreign direct investment and higher inward FDI. “So, the net FDI remains the same as the previous year,” he added.
Rajan said there was growth potential in the economy. “There is also the output gap. Output gap is how strong the economy is, related to how much it can produce; that’s a stock variable. I think the output gap is strongly negative now. So, there are dis-inflationary processes underway as a result. We have to wait and see. This is data dependent. This is not automatic, especially if there are one-time effects like vegetable prices, etc. Wherever the state of inflation is, interest rates have to be significantly above that.”
On Monday’s reduction in the Marginal Standing Facility rate, Rajan said: “I feel the interest rates we had in place as a result of the exceptional liquidity measures were a little high, given the growth and the inflationary situation in the country. We needed to get out of these at a measured pace, as we saw stability in the currency being restored. Post monetary policy, there was a bit of volatility in the currency but partly as a result of stabilising external conditions in the internal economy, we saw the currency stabilise.”
The governor said the government certainly had a fiscal consolidation path. “If you look at overall government spending, we are not an outlier as far as emerging markets go,” he said.
Asked whether it was time we buried the wholesale price index (WPI), Rajan said it could not be done till RBI was in a position to focus on only one index. “We have to take information that is embedded in multiple numbers of inflation. WPI tells us something about the price of traded, manufactured goods. CPI (consumer price index) tells us about services. So, each gives some information. The ideal situation is with both measures of inflation contained.”
On whether he was planning to make the seven-day or 14-day repo permanent, Rajan said this was meant to be a market development measure and RBI had to observe the process. “We will roll it out and work with it until we get some term money rate out there, of which private term money rates can benchmark and we create a stronger market,” he added.
On the government’s plan to infuse capital to bring down lending rates during the festive season, the governor said RBI was comfortable with that, as better capitalised banks were in everybody’s interest. In the process, some of these banks that have excess capital will be able to borrow and will have more ability to lend to productive sectors of the economy.
On new bank licences, Rajan did not comment on his earlier discomfort about allowing corporate houses to set up a bank but said RBI had no desire to change the rules of the game mid-way. However, he said, the central bank needed better “supervision bandwidth”.
“We have a committee looking into it. We have small banks, cooperatives and we only have partial jurisdiction over them. We have to find a way that our regulation can actually bite and that we can resolve small entities. Large banks don’t fail but small banks fail all the time. That’s the comfort level, that you can fail a small bank if it does badly and you don’t have to rescue it. But small banks also serve a purpose, in that they do lend to small businesses and local areas.”
