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“We are in a better position to face tapering as and when it occurs,” said Rajan in a post-monetary policy conference for analysts and researchers. The street does not expect the US Fed to rollback the stimulus for the next few months at least.
Rajan said the RBI and the government have spent a fair amount of time trying to narrow the Current Account Deficit (CAD). As far as CAD is concerned, he believed, India will be in a comfortable position. “As of yesterday the Foreign Currency Non-Resident Account (Banks) deposits plus capital raising by the banks has reached $ 12 billion. International markets are open to borrow in India. We have shown that whatever the CAD is, we can finance it if necessary from outside money. We also have substantial equity inflows. I do not want to be too complaisant about any kind of flows because what comes in can also go out. But the picture has changed little from what it was in May when the CAD was blowing out,” said Rajan.
Rate hikes
Rajan believes the central bank may have done enough on rate hikes, but they will need to monitor the economy. “I would not say that we have a set of rate hikes in mind and we are taking small steps towards that goal. We think we have done enough given what we know about the economy to wait and watch and see what happens,” said Rajan.
According to Rajan, the Indians have a very low tolerance for high sustained level of inflation. “There is some growth sacrifice already and there may be more of a growth sacrifice. We are getting calls from left, right and centre about the damage we are doing to growth. I do not think it is fair to say there is no growth sacrifice even now and we can’t say that, as a result of the rate hike, there will be no additional growth sacrifice,” he said. “If we tighten significantly more now, given the long lead time in monetary policy acting, we may find ourselves having overtightened and we do not want to go there with a weak economy,” added Rajan.
Limited borrowing by banks from RBI
Rajan believes that the RBI should be careful about letting the system rely too much on borrowing from it to fund activities. “There is a definite view in the RBI that we should be careful about letting the system rely too much on borrowing from the RBI to fund activities. These windows should not be permanent windows at any permanent level. But rather temporary windows for emergency liquidity. By setting a level and having people borrow for such long period of time, we are encouraging reliance on the central bank rather than going out and raising liquidity directly from the market. That to my mind is not a situation which is long-term tenable,” said Rajan.
According to Deputy Governor Urjit Patel, Liquidity Adjustment Facility (LAF) is a facility that banks should be using as a resource to moderate their daily fluctuations to liquidity requirements rather than a window where they should be borrowing every day in large amounts.
Food Security Bill
Rajan is of the view that the Food Security Bill may not turn out to be an expensive affair. “The Food Security Bill does sound like an awful lot of food being given at relatively low prices. But if we look at the Bill when it is rolled out fully, most reasonable estimates of how much it will cost will be in the order of Rs 1.5 lakh crore, translating that into 1.5 per cent of the Gross Domestic Product (GDP). Currently, the spending on food is approximately 1 per cent of the GDP. When the Bill is fully rolled out, that 0.5 per cent point of GDP addition will be there. If sensible economics plays out, the spending on fuel subsidies will be reduced by that much by the time the Bill is fully rolled out,” said Rajan. According to the Governor, there are baby steps being taken on diesel and hopefully a bigger step will be taken when the political opportunity arises.
“By every rupee diesel prices are increased, saves about slightly less than 0.1 per cent of GDP and therefore if diesel prices are brought fully to market, it would compensate for the increase in food subsidies,” said Rajan.
Inclusion of Indian bonds in global bond indices
The RBI believes that there is a need for matching of their comfort level with bond index comfort level. “We are yet to take a calibrated call because in the recent past we have seen when we had opened up more towards the debt segment, the maximum hit has come from the debt segment and outflows have been very large. There has been a lot of volatility because of the debt segment. If we can strike a balance between their requirement of unlimited access and at the same time opening in a calibrated manner with a bias towards long-term real money invested. Discussion are on and we have to see how to strike the balance,” said deputy governor, HR Khan.
Exchange rate
The RBI is keeping a close watch on the exchange rate market and accordingly based on their comfort the demand from Oil Marketing Companies (OMCs) will be brought back into the system. “We are watching the exchange rate market. When we feel fully confident that the exchange rate market is working normal, then we will bring back the oil demand into that market, but also any flows we should direct into the market rather than away from the market into our corpus,” said Rajan. He also added that the RBI does not have a value of rupee in mind.
Repo rate to be the operational rate
“We are giving about 1 per cent at the LAF rate through the LAF window as well as the export re-finance. It is the additional that is being kicked over to the term repo and the Marginal Standing Facility. There is a whole lot of liquidity that the RBI is providing now. What we would like to see is the operational rate come down to LAF rate and at that point we will take a call on how much liquidity we feel comfortable within the system,” he said.
