 "The Reserve Bank of India (RBI) Governor Urjit Patel speaks during a news conference after the bi-monthly monetary policy review in Mumbai (Pic: Kamlesh Pednekar)")
Addressing the media at his first monetary policy conference as the governor of the Reserve Bank of India, Urjit Patel spoke about inflation, transmission of rate cuts by banks, as well as steps taken to resolve the issue of burgeoning bad loans. Edited excerpts:
How has the Monetary Policy Committee (MPC) taken off and how are you going to navigate it?
We have been meeting over the past day and a half, going through presentations, discussions and coming to a conclusion on the repo rate. We have a great MPC. The three external members are of outstanding pedigree. They are well-known academics and have been involved in policymaking for a long time and bring value and a dispersion of opinion, which is what the MPC is about. Our discussions were frank, often intense, but always friendly. We allowed each other to speak and ensured that we agreed on a resolution.
Cuts in the past have not resulted in meaningful transmission by banks. Do you expect banks to pass on this cut?
The answer can be given in two parts. One, the transmission through money markets has been swift and decisive and corporates are using those parts of the financial system more compared to vanilla bank credit. I agree that transmission to borrowers has been less than what anyone of us would have liked, and we are hoping that over the next quarter or two this will improve. Also, keeping in mind the government has reduced the small savings rate, its intention to bring that money into more market-related investments is also amplified. The MCLR (marginal cost of funds-based lending rate) calculation itself will now throw up more transmission. One thing to distinguish is that transmission has been much more in case of new lending.
How much of this policy is a continuation of the previous policy? Are you persisting with removal of liquidity deficit and maintaining neutral liquidity?
Yes, we will continue with the policy of removal of liquidity deficit. We have not referred to it in the policy document because there is no change in stance.
Do you expect the 150-200 basis points positive real rate to persist?
The neutral rate is a time variant and changes with factors such as demographics or potential output. The world over this rate is going down and that is why you see many countries putting in place negative interest rates. As far as we are concerned, in continuation with what has been articulated before, if you look at our risk-free rate, that is the Treasury bill rate, is 6.5 per cent and RBI’s projection of inflation stands at five per cent, which translates to a neutral rate of 1.5 per cent. But, factoring in the global situation, wherein neutral rates are declining, the real neutral rate could be around 1.25 per cent or thereabouts.
What is your view on the NPA (non-performing assets) issue?
The NPA situation is important for RBI and we will deal with it with firmness and also with pragmatism, so that the economy does not feel any lack of credit to support the economy’s growth. We must remember that this situation has not appeared overnight and, therefore, will require skill and thoughtful endeavour to resolve.
There are four stages — identification, recording and reporting of NPAs has been done satisfactorily, but we need to work more on the fourth leg, which is resolution. In fact, back in 2007 and 2008, the banking sector lent its balance sheets to support investments in infrastructure. Just five sectors — infrastructure, steel, textiles, power and telecom — contribute 61 per cent to stressed assets. The sectors are individually important and dealing with stressed assets will require skill and creativity. We are working with banks and the government in this regard. We have been at the forefront of improving creditor rights in India and the bankruptcy code is an example of this. But like all legislation, it will take time to settle.
How has the Monetary Policy Committee (MPC) taken off and how are you going to navigate it?
We have been meeting over the past day and a half, going through presentations, discussions and coming to a conclusion on the repo rate. We have a great MPC. The three external members are of outstanding pedigree. They are well-known academics and have been involved in policymaking for a long time and bring value and a dispersion of opinion, which is what the MPC is about. Our discussions were frank, often intense, but always friendly. We allowed each other to speak and ensured that we agreed on a resolution.
Cuts in the past have not resulted in meaningful transmission by banks. Do you expect banks to pass on this cut?
The answer can be given in two parts. One, the transmission through money markets has been swift and decisive and corporates are using those parts of the financial system more compared to vanilla bank credit. I agree that transmission to borrowers has been less than what anyone of us would have liked, and we are hoping that over the next quarter or two this will improve. Also, keeping in mind the government has reduced the small savings rate, its intention to bring that money into more market-related investments is also amplified. The MCLR (marginal cost of funds-based lending rate) calculation itself will now throw up more transmission. One thing to distinguish is that transmission has been much more in case of new lending.
How much of this policy is a continuation of the previous policy? Are you persisting with removal of liquidity deficit and maintaining neutral liquidity?
Yes, we will continue with the policy of removal of liquidity deficit. We have not referred to it in the policy document because there is no change in stance.
Do you expect the 150-200 basis points positive real rate to persist?
The neutral rate is a time variant and changes with factors such as demographics or potential output. The world over this rate is going down and that is why you see many countries putting in place negative interest rates. As far as we are concerned, in continuation with what has been articulated before, if you look at our risk-free rate, that is the Treasury bill rate, is 6.5 per cent and RBI’s projection of inflation stands at five per cent, which translates to a neutral rate of 1.5 per cent. But, factoring in the global situation, wherein neutral rates are declining, the real neutral rate could be around 1.25 per cent or thereabouts.
What is your view on the NPA (non-performing assets) issue?
The NPA situation is important for RBI and we will deal with it with firmness and also with pragmatism, so that the economy does not feel any lack of credit to support the economy’s growth. We must remember that this situation has not appeared overnight and, therefore, will require skill and thoughtful endeavour to resolve.
There are four stages — identification, recording and reporting of NPAs has been done satisfactorily, but we need to work more on the fourth leg, which is resolution. In fact, back in 2007 and 2008, the banking sector lent its balance sheets to support investments in infrastructure. Just five sectors — infrastructure, steel, textiles, power and telecom — contribute 61 per cent to stressed assets. The sectors are individually important and dealing with stressed assets will require skill and creativity. We are working with banks and the government in this regard. We have been at the forefront of improving creditor rights in India and the bankruptcy code is an example of this. But like all legislation, it will take time to settle.
