Reserve Bank of India Governor D Subbarao addressed a press conference after presenting the first quarter review of the monetary policy. Excerpts:
Do you see scope for a further reduction in lending rates, particularly by private banks?
There is scope for reducing lending rates within the policy rate adjustments already done by RBI. Interest rates for short-term credit should be around 9.5 per cent but these are around 10.5 per cent. So, there is scope for banks to reduce lending rates.
As deposits contracted at higher rates mature and get re-priced, the cost of money to banks will come down and they can look to reduce lending rates.
RBI has projected GDP growth of 6 per cent with an upward bias. What are the risks that could affect the growth rate?
First is agriculture. According to the latest figures, the rainfall is 19 per cent below normal. In the Reserve Bank, we do a foodgrain production-weighted rainfall index, which is 69 today as against 129 at this time last year. Performance in agriculture could, with some lag, spread into industry and services, and that is the second factor. The third risk factor could be export performance. Exports have been negative for a few months in a row. Even though exports make up only 15 per cent of our GDP, they are quite significant. So, export performance is a risk factor. The fourth factor is investment demand. That has to pick up. Most bankers I spoke to have said that the demand for credit is picking up on the back of demand from projects in housing and real estate. However, some banks have said that although sanctions have increased, disbursals have not picked up. So that is one risk factor.
Do you think there will be an increase in the borrowing programme in light of the sops announced by the finance minister?
I do not expect the market borrowing programme to be any larger because fiscal implications of yesterday’s announcements are quite limited. The government is very conscious of the need for fiscal consolidation. But should they increase the borrowing, I am quite confident that the Reserve Bank will be able to manage that.
What sort of a roadmap do you expect from the government to control the fiscal deficit?
Having worked in the finance ministry earlier, I know that when you give fiscal deficit targets, you also need to give details of expenditure and revenue targets. Second, we also talked about the quality of the fiscal adjustment because that is equally important. And now that I am outside the government, I can say this without any sense of responsibility that there has to be an emphasis on quality of fiscal adjustment.
Is RBI comfortable with the steep yield curve? Will it result in a liquidity trap where banks borrow short-term and lend long-term?
It is not customary for RBI to comment on the comfort level but we do look at the yield curve and have tried to influence it. After the last policy, we did a review and changed the maturity profile of the government borrowing in order to manage the yields towards small loans and others.
RBI has not been doing OMO aggressively. You had said you will purchase Rs 80,000 crore of bonds, but till date, you have purchased just Rs 33,000 crore worth of bonds.
OMO depends on the kind of bids we receive. There is nothing about being aggressive or non-aggressive. It depends on conditions at that time.
Most market players have been saying that winding down of OMO and MSS is monetisation of deficit. What is RBI’s view on this? What we are having is a problem of terminology. If we agree on the terminology, this confusion will not take place.
First is the OMO, whereby the central bank operates in the secondary market — that is monetisation. There is the alternative of private placement with RBI or RBI operating in the primary market.
That also leads to monetisation. But that is prohibited by the FRBM (Fiscal Responsibility and Budget Management) Act.
What we are prohibited by the Act we are not doing. Both of them can lead to monetisation, but we are only carrying monetisation that is permissible.
Do you think the worst is over?
I wish I could definitively say that. Our financial sector only had hiccups — we didn’t have any deep structural problems and it has recovered, but the challenge going forward is to increase flow of credit. We talked to bankers and they said the demand for credit had come down. We talk to the corporate sector and they say the supply has dried up, so evidently there is a mismatch there.
Would you be taking any measures to direct credit to the core sector?
Not really. We will do whatever is within the ambit of the monetary policy to ensure that there is adequate credit. However, we will also have to make sure that the credit flow is well-regulated and prudent. We cannot allow credit policy to deteriorate in order to increase flow of credit. There is no proposal to direct credit to infrastructure beyond what’s already there. There have been requests to raise the single borrower limit for banks lending to corporates. But we have decided not to increase the limit.
Equity markets have picked up, but the capital goods segment, which reflects investment demand, has been less impressive. Will RBI, in consultation with the government, make concessional long-term loans available to this sector?
The policy objective of RBI is to ensure credit flow to all productive sectors of the economy. The latest IIP (industrial index of production) numbers show that capital goods and consumer non-durables have still not picked up. We cannot ensure directed flow of credit to specific sectors, except in crisis situations. While we want long-term credit flows to improve, there is no policy proposal to seek flow of credit to specific sectors.
You said PSU banks are looking to raise capital. Is there an assessment of how much capital is required by these banks?
We have an assessment of the capital required. We are not in a position to share that figure right now.
Will RBI look at changing accounting standards and having banks include floating provisions under provisions and not under Tier-II capital?
For banks, capital is already good, both Tier-I and Tier-II, which is a good cushion for growth. As far as floating provisions are concerned, there are a lot of changes happening internationally in terms of creating buffers in good times so that you can draw them down in bad times. In that sense, we did issue that circular encouraging banks to make floating provisions. On use of those provisions, we told banks we will give directions when international rules are clearer. In the meantime, we have allowed banks to do it this way or that way. We have an open view on this.
RBI has been criticised for not managing forex reserves in a proper way. Is there any policy to contain the losses and change the forex mix away from dollar holdings?
For forex reserves, we have an active management policy. We do not disclose the composition of the reserves, except with a lag. Obviously, our aim is to increase the returns. We have no concerns about management of forex reserves. The returns on our reserves are higher than most other economies.
