Interacting with the media after releasing the first quarterly review of the monetary policy, Reserve Bank of India (RBI) Governor D Subbarao shared his thoughts on a spectrum of sectors. Edited excerpts:
Domestic economy
There is widespread expectation of a slowdown in the global economy in the second half of 2010.The macro developments in India are contrarian to the global trend. We have recovered faster, but our inflation rate has also been higher. The recovery process has also consolidated and is more broad-based since April.
Banking
The RBI’s LAF operates in such a manner that systemic liquidity alternates between surplus and deficit, even at the margin. The overnight call money rate alternates between the repo rate and the reverse repo rate.
Agriculture
A big unknown in 2010 was the outlook on monsoon. That has since become a known, in the sense that the rainfall has been better than last year and the crop-wise area sown offers hope for cautious optimism on the agriculture front. Better farm prospects should give a pick-up to rural demand. The rainfall has been 86 per cent of the long-period average and has been well-distributed across the country, except in some parts of central India, like Madhya Pradesh. All of us are chasing the monsoon.
On inflation
The inflation trajectory is probably at its peak. Beyond next month, we should see inflation coming down, if nothing, due to the base effect. Then there is the de-regulation of petroleum prices. If more petroleum products are de-regulated, that will have an impact on inflation. There are demand-side factors too — capacity utilisation is not at its cyclical peak, but is close to that.
As much as our policy is calibrated to control demand-side inflation it is important to continue to keep an eye on demand-side pressures. Also, if there is spare capacity around the world and if our import requirements are higher, there could be softening of prices of imports and import substitutes and, finally, on the downside, the monetary policy action since January will start kicking in now.
On rates
As credit demand picks up, as liquidity becomes tighter and as other monetary policy measures start playing up, we expect both deposit rates and lending rates to go up. Bankers expect credit growth to pick up in the second half of the year and, as that happens, the incentive to raise rates will be greater. Deposits have gone down because public sector companies, particularly oil companies, have been withdrawing deposits, mutual funds have been withdrawing deposits and the public has been choosing to hold cash instead of putting it in deposits with the expectation that interest rates are going to go up. We expect that to reverse because an 18 per cent growth is important for other variables.
Borrowing programme
We have not heard anything on the borrowing programme from the government. So, that stands as it is.
Global outlook
The IMF has raised its growth forecast for global growth, but its sunny outlook is not widely shared. There is disappointing news from around the world about the sovereign debt crisis in Europe, unemployment rates, the uncertainty in the financial sector... What is of greater concern is that subdued outlook is also transmitting to emerging market economies (EMEs). Even in the crisis years, we had net positive capital flows — not enough to cover current account deficit, but it was there. This year, our calculation is that capital flows should be enough to cover our current account deficit, but it depends on the external situation.
LAF corridor
The RBI’s Liquidity Adjustment Facility (LAF) operates in such a manner that systemic liquidity alternates between surplus and deficit even at the margin. The overnight call money rate alternates between the repo rate and the reverse repo rate. As the systemic liquidity transits from a unidirectional surplus mode to a bidirectional mode, it will have implications for the effectiveness of monetary transmission. In the context of the changing liquidity dynamics, the LAF operation needs to be studied. Accordingly, it is proposed to set up a Working Group to review the current operating procedure of the monetary policy of the RBI, including the LAF. We have not determined what would be a comfortable corridor in an equilibrium situation. That is something the group will be looking at. In the future, a zero-width corridor is a distinct possibility.
Asset prices
Equity prices have gone up last year and this year, too. Gold prices are at an all-time high. In Mumbai and Delhi, we are told real estate prices have reached pre-crisis levels, while in other cities, they are inching up as well. While we have not made an explicit statement on asset prices, they have always been a part of RBI’s inflation calculation.
Licences for new banks
The discussion paper should be out by the end of this month or the first week of August. There have been a number of issues, like what should be entry-level capital, promoter capital, whether we should allow companies to come in, whether we should allow NBFCs to come in...
Loan recast
There was one airline that had approached us and we told them that it was not RBI’s policy to approach matters on a company-by-company basis or, indeed, on a sector-by-sector basis. But, subsequently, we were told that the entire sector was facing problems, not just in India but globally. So, it was decided that Deputy Governor Usha Thorat would meet the bankers. Basically, there has been multiple banking and one airline company had relationships with many banks. We said that we could look at the issue if the bankers came to us as a consortium and we would look for a holistic and sustainable solution. So far, the banks have not come back to us.
