 "Raghuram Rajan")
At the media interaction after announcing the fifth bi-monthly monetary policy review, Reserve Bank of India Governor Raghuram Rajan spoke on a range of issues. Edited excerpts:
On growth
What causes growth? It's actually a mix of a whole lot of factors. So, I would be far from claiming credit for monetary policy. Lots of other factors, including the feel-good factor introduced by the government, public investments, lots of other things go into this.
We are all working together to ensure growth takes place. I think it is in our collective interest and I kept emphasising and I will emphasise again, RBI is not against growth. We need sustainable growth, we will ensure there is sustainable growth and we will ensure the maximum sustainable growth we can get. Sustainable means within the bounds of inflation we are willing to accept and that's what the government sets for us. Our job is to ensure the maximum growth consistent with that.
On asset reconstruction companies
We are very open to entities which want to set up ARCs (asset reconstruction companies). There is a process of licensing and they have to apply. If entities want to put more capital to existing ARCs, get licences to become new ARCs, we are very open. Especially if foreign entities want to bring in more capital into the business, they are most welcome.
On state electricity boards' restructuring plans
The banks will take a view on what they (state electricity boards) are supposed to do with their loans; ultimately the loan is from the bank to the discom.... Bonds can be used to repay loans but the banks don't have to buy the bond. What we have to see is what final structure emerges, the I's are being dotted and T's are being crossed. Banks have their boards and they have to make decisions based on their capacity.
On high foreign shareholding in small finance banks
They have been given 18 months and that is a fair amount of time to do what they need in terms of raising or altering their capital holdings.
On yuan devaluation
The Chinese devalued (yuan) initially and then it stopped; in fact it came up a little since then and perhaps with the Chinese inclusion in the special drawing rights basket, you might see a little more of that. But, we don't see the exchange rate as something we can manipulate in a significant way to attain whatever macro objectives we have. We have said repeatedly that our intent is to minimise volatility in the exchange rate, rather than target a particular level. The market determines what is reasonable given the various market forces that are underway. Over the course of the year, the nominal effective exchange rate has been almost flat.
Pace of PSB reforms
A number of actions have taken place, including splitting of the chairman and the managing director's positions, appointing some private sector bank CEOs. There is also a process of appointing new bank board members, typically more professional. The bank boards bureau is being set up, so a number of actions have taken place. My sense is that they have been all quite positive and, of course, these things play out over time. It is absolutely crucial also to meet the target (of banks cleaning up their balance sheet by March 2017). If you take the broader process that we take with the government, it is first that we change the governance process of banks, move towards cleaning up of the banks' balance sheets and appropriate recapitalisation and then they will be in a position to do the kind of leaning the economy will need as the recovery picks up steam. That is the process being followed and is well underway.
Fiscal deficit
Clearly, both quantum and quality matter... I am hopeful that while maintaining the fiscal consolidation path, the government can also maintain or enhance the quality of the Budget. It is clearly an issue that they and us will be looking at.
Impact of 7th Pay Commission on inflation
In the broad sense, there is going to be additional expenditure but it will also be offset presumably by additional revenue raising or cuts elsewhere, so that the fiscal consolidation path is maintained. In that sense, we don't feel there will be a significant impact on aggregate demand, provided you maintain the fiscal path.
On rupee's internationalisation
All these are in the direction to broaden and open up a little more but at the same time, it is not a big bang, where we lose control. It is a steady process... We are steadily moving towards being a much more open economy, while keeping some of the concerns about stability, making sure we have things broadly under control.
Comparison with China
On some dimensions, we are ahead of China. In terms of the degree of competitiveness within the banking system, some of the markets, we have made some steps which put us ahead.
