Reserve Bank of India governor Bimal Jalan has ruled out further tightening measures to prop up the rupee. In an interview with Business Standard""his first after the rupee slide""the RBI governor said he was "not considering any further hike in CRR and bank rate just now". He also pointed out there was no immediate plan for abolishing the EEFC facility to increase the dollar inflow.
Jalan seemed unperturbed by the rollercoaster ride of the rupee since the beginning of this fiscal and said there were enough weapons in the RBI's arsenal to tide over the present uncertainties in the forex market. The rate hike would not affect the industrial growth and there was nothing much to worry about on the balance of payment front, he said. Jalan also hinted that the RBI could take higher private placements to see through the successful completion of the massive government borrowing programme. Excerpts:
BS: RBI has drawn a lot of flak from all quarters for its monetary and other measures to check the slide in the rupee...
Bimal Jalan: Healthy criticism is welcome. When a situation is a bit rough, criticism is to be expected as some unpleasant decisions are unavoidable. Rese- rve Bank had also received a lot of praise earlier for its handling of the situation arising from East Asian crisis, sanctions and the Kargil conflict...When the dust settles down, I am sure we will see a better appreciation of the RBI actions.
BS: What was the provocation for reversing your earlier monetary stance and raising interest rates on July 21?
BJ: When the underlying situation changes or when new information comes in, a change in the course of action is necessary in short-term monetary management. From time to time, all central banks have to do this. For example, US Federal Reserve was consistently reducing interest rates until the end of 1998. From mid-1999, it had to change course and it started raising interest rates.
Similarly, the European Central Bank which had earlier reduced Interest rates by 50 basis points in April 1999, decided to hike rates in October '99. Bank of England, which had eased rates in June 1999, reversed its stance and hiked rates in September 1999. Such reversals, in the light of emerging situation, are unfortunately unavoidable. To simply wait and stay put, when some action is required, will be worse.
BS: But couldn't you anticipate these developments? Why did RBI reduce interest rates on April 1 only to raise them in less than four months?
BJ: With the benefit of hindsight, it is always possible to take this view. However, please consider that in March this year alone we added more than $2 billion to our reserves as capital flows were very strong. In this situation, it would have been difficult to anticipate that our forex markets would come under pressure after a couple of months.
The latest increase in interest rates by 50 basis points in the US and Europe was in May-June 2000, well after the RBI action in April. In April, markets in the US, Europe and Asia were under pressure
as Nasdaq had fallen by nearly 25 per cent in mid-April. The situation has changed in recent weeks and there is now talk of 'soft landing' of the US economy in recent weeks. As a result, the US dollar has appreciated substantially against all currencies. The sharp turnaround in the international outook between April and July could not have been anticipated by the RBI or, for that matter, by any other agencies.
BS: The perception is that the July 21 RBI measures have failed.
BJ: In judging the effectiveness of RBI measures, it should be kept in mind that, in view of the change in the international situation, the objective of these measures was to make a correction at the margin in the attractiveness of holding rupees, rather than dollars, by exporters and others. We did not expect "instant" results.
The measures were relatively mild and were deliberately stretched out over a month. For example, in January 1998, during the Asian crisis, the bank rate was increased to 11 per cent compared with an increase to 8 per cent in July this year. If 'instant' results were expected, the increase in bank rate would have had to be much higher, which in the present situation was not considered desirable or necessary.
BS: Since the RBI maintains that the present slide in the rupee is demand driven, why don't you let the market decide the right level of the rupee?
BJ: If demand and supply have the requisite element of elasticity and the markets are deep enough, then this would be an option. However, at the present stage of our market development, where trading can be extremely thin and demand can be lumpy and unpostponable, the search for a right level may prove to be chimera during periods of uncertainty.
This is so even in developed markets during certain periods. For example, in respect of dollar-yen, in the past both US Federal Reserve and Bank of Japan have intervened in the market at different levels. Similarly, it is not easy to find a rational explanation for the sharp decline in Euro vis-a-vis dollar considering that the US has such a large current account deficit.
BS: Would not the hike in rates spoil the industrial growth prospects?
BJ: From a borrower's point of view, lower interest rate is, of course, always better than a higher rate of interest rate. However, remember that even after reduction of interest rates in April 2000, the latest data have shown some reduction in the growth rate for industry in May and June. We hope that a small increase in the rate will not affect growth provided, of course, other conditions are favourable. Industrial growth has to do more with other developments in the economy rather than with one per cent variation in interest rates on either side.
BS: Is there any plan to tighten liquidity further and hike the bank rate?
BJ: The central bank should never commit itself to an indefinite future. The only thing I can say is that we are not considering any further hike in CRR and bank rate just now.
BS: How about abolition of the EEFC account facility for the exporters?
BJ: No, not at the moment.
BS: The general perception is that you have exposed yourself to the market and there are no weapon left in your arsenal to protect the rupee.
BJ: It's a silly view. All normal instruments are available to use, including a very comfortable level of forex reserves, should it become necessary to use them.
BS: Is our balance of payment situation really precarious?
BJ: Not at all. The oil price is a little higher this year than that of the last year. However, the growth of oil consumption is not increasing very fast. We have added more than $10 billion to our reserves in the last two years and as much as $20 billion in the last four years.
This was part of conscious policy to take care of problems like oil price rise or volatility in capital flows. As you know, in August, there has been a substantial increase in FII inflows. Exports and invisible receipts, particularly from the IT sector, are also likely to be at record levels. There is no problem, provided we keep our heads cool.
BS: Do you see any problem in completing the government borrowing programme during this fiscal? Won't it put further pressure on interest rates?
BJ: No. Growth of reserve money and M3 growth this year is much lower than last year. So far, government's cash requirement has been lower than expected as revenue growth has been strong. If necessary, RBI can also take higher private placements initially and then sell securities gradually through its open market operations as the situation warrants. The precise yield scenario is, however, difficult to predict as a number of factors are involved.
BS: It's quite a few weeks now the RBI has been draining liquidity through its repo window paying 15 per cent for five-day money. Isn't it distorting the yield curve? How long do you plan to continue with this?
BJ: You are right. At present, there is a distortion in the yield curve as very short term repo rates are high. How soon this can be corrected I am not able to say just now.
