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The wholesale price index (WPI) has shrunk to a five-year low in August but Reserve Bank of India (RBI) Governor Raghuram Rajan remains unmoved. Two weeks before the monetary policy review, Rajan on Monday said inflation was still high and there was no point in lowering interest rates to have inflation picking up again.
Speaking at a banking conference here, the RBI governor said he had “no desire to keep the interest rate higher than it should be — even for a second more than needed. The interest rate will be brought down when we have won the fight against inflation.” The conference was organised by the Federation of Indian Chambers of Commerce and Industry and the Indian Banks’ Association.
The consumer price index (CPI)-based inflation, which the RBI tracks, had eased to 7.80 per cent in August from 7.96 per cent a month earlier. Rajan said the downward trend in inflation was “consistent with RBI forecasts”.
Rajan’s statements suggest the repo rate might be kept unchanged at eight per cent on September 30, when the Reserve Bank reviews its monetary policy.
| THE GOVERNOR SPEAKS |
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We need to seize this moment to eliminate diesel subsidies completely
On economic growth, Rajan said the recovery was still “uneven”, though the country was doing better than a few months earlier. In July, India’s industrial production grew only 0.5 per cent from a year earlier — down from 3.9 per cent in June and lower than the expected two per cent growth rate. Rajan said strong export data and accelerating car sales growth suggested the economy could be gaining momentum, but “it’s still way before we are out of the woods”.
Rajan expressed concerns over sluggish investment growth.
"Investment growth is yet to pick up. When we look at investment growth, we also look at credit numbers, which have not yet picked up as strongly. Probably, the reason is that large companies are tapping the financial markets; bond issuances have been significant in the past few months," he said.
On the recent dip in global oil prices, the governor said the government must take advantage of the lowest level of oil prices in a year to free up the fuel prices and reduce subsidies. Brent crude oil has fallen 14 per cent since June to $96.38 a barrel. "We need to seize this moment to eliminate diesel subsidies completely. We can wait, of course; but the moment will leave us and we might be back to subsidising," Rajan said.
The RBI governor noted how a differentiation in the interest rate cycle in the world's largest economies was a large question looming over India's future. It might bring some respite to India in the coming months but it could also make the global environment more perilous for emerging economies.
"We are probably reaching closer to the initiation of interest rate increases in the US; there may still be a long time for Japan and the euro area," Rajan said. "There will be differentiated situations across the world which could be a blessing. There might be their own source of turmoil as exchange rates move significantly differently on the basis of who starts first and who starts later."
Rajan said banks would have to continue to finance infrastructure projects because, "fortunately or unfortunately", there were no other entities to do long-term financing. But he also asked bankers to become better in evaluation of projects. "We need better evaluation, which cannot be outsourced. We need early recognition of projects and quick and effective project restructuring for distressed projects," Rajan said. He also touched upon the recent incidents of corruption in public-sector banks and said the system needed to use its strengths by weeding out "bad apples" from the system.
"Public-sector banks have to have the freedom to make commercial decisions. They are not extensions of the government any longer. Government mandates should be backed by financial payments. We are taking up this issue with the government; let's see how it works," Rajan said.
Referring to the recently launched Pradhan Mantri Jan Dhan Yojana, Rajan said the scheme was a good one, provided banks did not focus only on adding numbers, as that could lead to duplicate accounts or accounts opened for people who were not the targeted beneficiaries.
Rajan said the political class in the country had to understand that waiving loan repayments did not help the poor. "Waiving loans is an unhealthy activity. Every time a waiver is done, it diverts access to credit and shrinks credit availability. In 1989-90 and again in 2009, agriculture credit dropped after a big loan waiver," he said.
RBI has mandated banks to maintain 60 per cent liquidity coverage ratio from January 1 next year. It has also suggested the ratio be increased to 100 per cent by January 1, 2019, in a phased manner. "We have to make sure that we fulfil the purpose of liquidity requirement; that is, we have liquid assets to the extent that they are built over and above the existing liquid assets you have for other purposes like statutory liquidity ratio requirements,” Rajan said.
