On our ability to act, there should be no question: Raghuram Rajan

Interview with RBI Governor

RBI Governor Raghuram Rajan took questions from journalists after the central bank’s policy statement. Edited excerpts:

On inflation

Relative to our April stance, the data that came in surprised on the upside. The inflation reading in April was higher than anybody in the markets or we expected. Now, going forward, we have to see how it pans out. It is one month's readings, we have to see how the monsoon plays out, how that affects food prices, we have to look at supply management by the government.

I hate these bird analogies — hawkish, dovish, etc. I would say that it is a realistic assessment of the data that have come in, there are also potential disinflationary pressures, there are also potential inflationary pressures. The net effect — we have put a little more  weight on upside risks on inflation but we have to wait and see. The target (remains) five per cent by March 2017 and we have to figure out how to attain it. The monsoon could be a source of disinflationary pressure. If some salient prices come down rapidly, that could also bring down expectations.

What about transmission, now that MCLR (a marginal cost-based lending rate regime) is in place?

It is early days yet; it has been in place only for a month. We have to see how it transmits into lending rates. There is an MCLR and banks have to add a spread to it and we have to see how that moves. It is going to take a little while before we can assess fully whether it has the effect intended.

In July, because of redemptions, we might reach neutrality. Will you continue with OMOs (open market oeprations), make up for the backlog of (liquidity) deficit? Do we reach neutrality early? What about rupee liquidity?

We will monitor both dollar and rupee liquidity, and act appropriately. On our ability to act, there should be no question. At the same time, we do not want to encourage complacency on the part of people who have sold us dollars, assuming we will come in when they can't provide the dollars to us and bail them out. That is not the intent.

As far as separation from long-term liquidity and short-term liquidity goes, the idea is to move long-term liquidity to a neutral position and that will take some time. We might find periods when the market is not borrowing from us. That doesn't necessarily mean the long-term liquidity is in balance at that time; it could be a period of surplus. We will have to achieve that over a period of time and it is something we will work on. I can't give you a date but we will be opportunistic in getting there.

On extension of his tenure as RBI governor

As far as the question of my continuing in this position after September 4 goes, it would be cruel of me to spoil the fun the press is having with all its speculation. I am personally intrigued by all the letters I am supposed to have written. In all such cases, a decision is reached after discussion with the government and the incumbent. I am sure you will know when there is news. I cannot do better than point you to the statements of the finance minister and the prime minister on this.

On stressed assets resolution, are you okay with what the government is proposing?

There are a variety of stressed asset funds that one could think of. For example, one would be a lending fund that is not going to take assets off the bank; it is going to lend into stressed situations. Take a project which has already got loans from the banks but needs more funding. You could lend into that. Then, there are situations where you want to buy the asset. That looks more like a bad bank. There, the key question is, at what price? There are lots of ideas floating around as to how the price will be determined, as well as how the banks might feel confident in selling at that price. We have to see if in fact it works out.

The issue is not for me to be comfortable but for banks to be comfortable in selling at that price and for the stressed assets fund to pay a price it thinks is appropriate. That meeting of the two is a big issue which needs to be resolved. Banks want to sell at a price which typically ARCs (asset reconstruction companies) don't want to buy at. How we bridge that gap is something we have to wait and see.

Dollar inflow to not be taken for granted?

We have no desire to move the rupee in any way. At the same time, if people have contracted to supply us dollars, all we are saying is that they not rely on us bailing them out and us supplying them the dollars that they are going to have to supply us. They should be a little careful and enter into appropriate contracts.

What will the stance be, hold or accommodative?

We haven't shifted stance; we are still accommodative. We are still looking for room to ease. If that room opens up, we will be able to ease. Broadly, we are still in easing mode.

On the FCNR (B) maturity issue.

This is something we will monitor. We might supply dollars in case of extreme volatility but no one should take this for granted. We are, however, committed to supplying short-term rupee liquidity to the extent needed, to support our monetary stance. The bank is hedged but it might not have dollars at that point. So, it says we need to buy dollars from the market. Because all these deposits are maturing at the same time, we could find there is a lot of demand for dollars at that point.

All we are saying is that we are going to monitor that process. We have enough dollars to supply, if need be. But, we also urge those who have committed to supply us dollars to take cognizance of the position, that we are not going to make sure they make no losses in the process. We don’t want to create moral hazard in the system. We have no desire to move the rupee in any way.

What is your unfinished agenda?

Of what was listed in the initial plan, most of it has been delivered. If you ask me what needs to be done, going forward, one is to move inflation towards what the Urjit Patel committee report suggested and what is in our framework with the government, more to a comfort level in the band. The second is cleaning up banks' balance sheets, so that they can fund growth.

On reforms, market development, especially fostering a corporate bond market. This is something the Sebi (Securities and Exchange Board of India) chairman and I had a discussion on this weekend — we intend to move as fast as we can to remove impediments in this process.

Financial inclusion is an area where we need to do more. The need is to make lending to small and medium enterprises more effective, perhaps through these (coming) small finance banks.

On Liquidity Coverage Ratio.

It depends on the pace at which SLR (statutory liquidity ratio) is brought down. Clearly, we do not want to impose a double burden on banks, that they maintain SLR, as well as have LCR (liquidity coverage ratio). Where appropriate, we will make adjustments, so that they are not subject to two different standards. Essentially, if SLR is enough to fulfil the LCR requirements, we would not want to impose double requirements on them. So, we will look at that.

S S Mundra, Deputy Governor: In provisioning (for stressed assets), there are two aspects. You mentioned that they have made 15 per cent, yes, but even in the existing framework, there is a natural progression over a period of time. So, it doesn't move quarter to quarter and is a dynamic situation. As we have mentioned, a large part of it they were to recognise in the December and March quarters, which they have done. This year, we have suggested they address the potential weaknesses, which would entail making some provisions. So, the additional provisioning requirement in the year would come from identifying and addressing those situations, whereas the cases where provisioning has already been done will move forward.

Moving forward is a dynamic situation and it would be reasonable to expect that in some of the cases where banks are able to move towards a resolution, they would also be able to free some provisioning. Though we have not prescribed any benchmark, we would encourage banks to keep improving their provision coverage ratio on their own, as their financial position permits them to do.

How much capital contribution from banks in the stressed assets fund?

(Rajan): We have given our views. Majority ownership of such funds by banks is not appropriate.