Shaktikanta Das drops key rate hint, explains everything that's on RBI plate
The RBI Governor has revealed his vision for the economy and how he intends to steer this key institution.
The July 5 budget is behind us with the government doing what it could with limited fiscal space. What does the RBI have in its arsenal to boost growth?
What we will do in the coming months with regard to interest rates I cannot articulate as it is a decision that the MPC (monetary policy committee) will take. Headline inflation has been low and its projection going forward is also below 4%, but we are still concerned about headline inflation. The core inflation has been moderating and food inflation is inching up which means that by and large there is better price available to the farmers which will augment rural purchasing power. Given the inflation outlook and the growth slowdown as reflected in the lower GDP numbers, the MPC has already cut policy rates by 75 basis points (a basis point is 0.01 percentage point), plus we have shifted the stance to accommodative, which itself implies a rate cut of about 25 basis points. So, the effective rate cut will be 100 basis points and along with that in the last several months, we have infused adequate liquidity.
When the monetary policy framework was designed, it was done at a time when the real interest rate was in focus. The MPC hardly talks about it. Is it falling behind the curve?
If you see the RBI Act, it talks of inflation targeting. Price stability is defined in terms of inflation keeping in mind the objectives of growth. MPC always talks of inflation, policy rates, and stance. And, the other side of the coin is what you call real interest rates. To articulate on something like real interest rates would require a lot more analysis and a lot more study to say what is a desirable real interest rate for the economy. The law has given us a mandate to maintain inflation at 4%. MPC therefore focuses on this without getting into the real interest rate and whether we are moving in that direction. When we say inflation is low or likely to be low in the next 12 months and therefore we are cutting interest rates, it means we are moving to align our policy rates with inflation and inflation outlook which is nothing but the other side of the coin — the real interest rates.
So can we say a long period of dovish monetary policy is in the works?
You see once we are on an accommodative mode, it means we cut the rates or we maintain status quo. That is the implication of an accommodative monetary policy. It implies that a rate increase is off the table as long as the accommodative stance continues.
What about liquidity for non-banking finance companies (NBFCs)?
From June 1, the system has had excess liquidity of over Rs 1 lakh crore. We have also announced additional measures that will be available for NBFC credit that gives liquidity of Rs 1,34,000 crore. We have also said after the budget presentation we will back banks with liquidity if they so require. While the system is in liquidity surplus, it is possible that some banks may have liquidity deficit, so we can back them up with liquidity. Whatever is possible, within the role that has been assigned to RBI, we have taken all the possible measures. At the same time, we are also focusing on the aspect of financial sector stability, in terms of strengthening supervision and regulation of banks and NBFCs. Whatever is necessary to be undertaken in the future, the RBI will definitely respond.
What is your assessment of the economy? Why is the private sector not investing?
The Indian situation cannot be seen in isolation from what is happening globally. Global growth, which seemed to revive in 2017 and the first half of 2018, has slowed down from the second half of 2018 onwards. The IMF has given certain projections for world growth, but from where these growth impulses will come it’s still not clear. The total volume of debt which carries a negative interest rate is $13 trillion. Yields are either zero or in negative territory in several advanced economies. This overall situation gets further compounded by trade tensions and the contraction in world trade volume. We are also facing oil price volatility, which is a perennial issue we have to encounter. So, the world today is in a slowdown mode and India has to be seen in this context.
Investment isn’t picking up. What's holding it up ?
As far as India is concerned, there have been sectoral issues. My interaction with automobile sector leaders suggests that the BS-VI (emission) norms have had a dampening effect on sales volumes. Our own survey suggests that the mandatory three-year insurance has also had a negative effect on the sales volumes, particularly two-wheelers, etc. The NBFC sector problems also affected the credit flow to the auto sector. The textile sector has had problems.
What about issues in the financial services and real estate sectors?
We have dealt with the financial sector — we have infused liquidity and reduced rates. The government has maintained 3.3% fiscal deficit and that is a positive signal from RBI’s point of view. The infusion of ?70,000 crore capital in PSU banks is a positive sign. The NBFC initiatives announced by the government are also positive. These are challenging times and every stakeholder in the economy, including the companies, will have to play their role. The real estate sector has had its problems because of over-leveraging by housing finance companies and the developers themselves. That excess leveraging is getting corrected. I see some revival in the corporate sector. There have been considerable improvements in the twin balance sheet problem. The banking sector, which was squeezed due to the overhang of bad loans, is performing better with lower bad loan ratios… the provision coverage ratio of banks has also improved. The bank credit flow is also improving but yes everything is not alright. For example: Bank credit flow is mixed, there is no credit flow to the MSME (micro, small and medium enterprises) sector and that can improve.
Do the state-owned banks have the management bandwidth to face competition?
High capital infusion by the government puts additional responsibility on the banks. I have told the PSU (public sector unit) bank chiefs that the true efficiency of a bank will be measured not by an improvement in the bad loan ratio, which naturally gets better by capital infusion by the government. A truly efficient bank is one which accesses capital from the market. The merger/consolidation of banks is taking place to precisely address these issues (skills, leadership) so that the managements become stronger and they have the required bandwidth and imagination to run large-scale banking institutions.
The finance minister has spoken of PSU bank reforms. What can one expect?
There is a focus on governance reforms. RBI has given a number of suggestions to the government. We have made suggestions with regard to tenure, compensation, accountability. I have also said that the bank boards should play a better role in performance evaluation of chief executive officers which needs to be made robust. Either the board of directors can do it through a committee or they can form an expert review committee of peer group.
Do you think bringing down the government’s stake in PSU banks below 51% will help?
That is for the government to decide and today the focus is on consolidation of banks. So, we must give some time to consolidated large-sized public sector banks to play out their role. We need strong and robust governance in PSU banks. Ownership and management efficiency are two different things. In the context of India, we also have to realise that the public-sector nature of banks is important to fulfill certain objectives of the government. For example, direct benefit transfer is desirable. It would be difficult to implement it entirely through a private sector setup.
Bank officials also talk about fear of investigative authorities... What does the RBI feel?
Some action in certain cases has created an element of fear in the banks. What we need is a proper decision-making process in banks and these decisions have to be well-articulated. Every decision has to be backed with proper logic and argument. Once the system of taking decisions and recording it is improved, it should address this concern. The fear factor has to be addressed by installing stronger internal controls. When a matter is taken up by investigative agencies, they will understand why a decision was taken.
Financial markets are still worried about NBFCs — liquidity and capital are a concern. How long do you think this dislocation will continue?
I don’t mean that all policy actions are done. As and when actions are required we will take it. Banks are not yet out of the woods. Therefore, improvement in GNPA (gross non-performing assets), PCA (prompt corrective action) — that momentum will have to be sustained. When we removed some banks from PCA, we have said that it is the responsibility of the chief executive and the top management to ensure improvement in books and it will be their personal obligation to ensure that whatever projection or targets they have given for the next few quarters will have to be met. I have told banks that we cannot afford surprises. Another important aspect is that this should not lead to knee-jerk reaction on declaring some account as fraud... a balanced and responsible call has to be taken. Under the June 7 circular, banks have been given greater responsibility for resolution of stressed assets. They have to play a proactive role. We have given the provision of inter-creditor agreement so that every bank is a part of it. Those who don’t agree will get the liquidation value. The banks have shown better results in the last couple of quarters and my interactions and RBI’s assessment suggest they are on a path to improvement.
The RBI has ruled out a liquidity window, but any NBFC collapse could have a contagion effect. Isn’t that a worry?
The liquidity window is a misnomer — the RBI cannot be giving clean money, unsecured money to NBFCs. RBI can provide money through the banks. They can do the due diligence and lend money to NBFCs. We have ensured there is adequate liquidity with the banks. We are monitoring the top 50 NBFCs very closely which we have identified on the basis of their past credit behaviour, size and business volume. We have also interacted with the banks and they are trying to find market-based solutions to the problems like bringing in additional promoter equity, initiating stake sale, securitisation of assets. In large cases like IL&FS, banks are expected to go in for faster resolution wherein the promoters have to make sacrifices and banks as well will deal with it appropriately to ensure that a systemically important NBFC does not collapse. I am not referring to any particular NBFC, but if there are governance deficits noticed, certain faulty business practices are noticed, these NBFCs will have to take a larger cut themselves.
The RBI in the past has been choosy about allowing NBFCs to transition into banks. Will it be more liberal if they come up with market solutions?
There cannot be an automatic transition of NBFCs into banks. Banking licence is on an on-tap mode and anybody can apply. RBI will examine these requests keeping in mind all regulatory parameters. If that application passes the test, that licence will be given but there cannot be automatic transition of NBFCs into banks.
Do you see a need for reform in the rating agencies that are under the scanner for their conduct?
Rating agencies and auditors are two aspects on which a lot of questions are being raised. Rating agencies are regulated by SEBI (Securities and Exchange Board of India) and auditors are under MCA (Ministry of Corporate Affairs). It will be wrong to paint all rating agencies and auditors with the same brush. There have been lapses and there were certain practices that should not have been there. Regulators are themselves taking action and enforcement agencies are also taking action. Let us also remember while all this is happening our entire time should not be on fault finding. Those who have committed lapses and irregularities will have to face the consequences. But we have to engage with them and improve their internal systems and procedures.
The RBI-government relationship went through turbulence. How is it now?
That is for you to judge. You must recall what I said on the first day. I believe in having consultations with all stakeholders and the government is much more than a stakeholder. Therefore, internal consultations and discussions should resolve all issues. There can be differences of opinion and they are bound to be there. In the government also, even within a ministry, there are different points of view before a decision is taken. But all the decisions will have to be discussed and resolved. I have had no such difficulties.
What is RBI’s view on what should be the appropriate level of reserves that it should maintain?
The committee is examining it. Only when the committee’s report comes we will examine and take it to the central board. We expect the report shortly.
RBI replaced the February (2018) circular with the June (2019) one. The mandating of inter-creditor agreement appears to be coming in way of some bankruptcy resolutions. Why was it made mandatory?
Asset quality kept on deteriorating because loan restructuring was not done in time. When we analysed as to why loan restructuring could not be done in time, we found that out of 15 banks in the consortium, 14 had agreed and the 15th one did not. Had that loan been restructured well in time, quality would not have deteriorated. To prevent this situation, we have made the inter-creditor agreement mandatory.
Two former RBI governors have cautioned against the government’s overseas borrowing plan. Have the RBI’s earlier strong views against it changed?
RBI is the debt manager to the government. There is a process of consultation between the RBI and the government on matters relating to the borrowing programme. The process of consultation has already started. We have given our inputs and conveyed our views to the government. So, whatever we have to say to the government in the matter we have indicated internally.
The RBI introduced group exposure norms to reduce risks banks take. Isn’t it an issue for the manufacturing businesses?
There will be difficulty initially to comply with any new regulation. Obviously, we cannot expect them to comply overnight — it’s a process. Before announcing these measures, we had examined which are the large corporate portfolios or large entities that would be impacted. The list is very small. It’s a question of reallocation of their loans. They have to shift part of their exposure to other banks. Over a period of time, they would be able to comply. This is a regulatory requirement in the overall interest of larger financial stability. We are confident that over a period of time they will be able to comply.
RBI Has Autonomy in Functioning and Decision Making
Many foreign investors want to go beyond 26% in an Indian private sector bank. Will the RBI be open to that on a case-to-case basis?
At the moment there is no such proposal. Secondly, as a regulator, we would like to avoid a case-to-case basis. If we feel there is a need for a change, then that has to be an overall regulatory change available to everyone. We will avoid case-to-case basis.
RBI came under the lens after the scam at Punjab National Bank (PNB) was unearthed. Was the RBI lax?
Enough has been said and written on the PNB issue. RBI has issued certain regulatory guidelines on the compliance of SWIFT (Society for Worldwide Interbank Financial Telecommunications) norms. I would not like to go into the individual case of PNB, but it is the constant endeavour of every regulator to continue to improve its standards and mechanisms. In the case of PNB etc., it was a different kind of situation. It was not a regulatory failure as such. It was an oversight failure within the organisation (PNB) where action has been taken.
The government has transferred housing finance company regulation to the RBI. Does that have a bearing on payment regulation too, where there was a demand for separation?
On the payment regulator issue, the RBI has given its views. There is no further discussion on that issue. If and when that issue comes up, we will discuss and resolve it with the government. In any situation, it is like this — either you convince me or I convince you. And, we try to convince each other internally. That has been my approach and that will continue to be my approach.
What is the RBI’s stance on cryptocurrencies ?
RBI has in April 2018 issued a very clear-cut circular to the banks saying that banks shall not have anything to do with cryptocurrencies either in financing or in transferring money etc. In the 2018 budget, the finance minister had expressed concern about cryptocurrencies. First, the issuance of currency is a sovereign function world over. World over that function has been delegated by the sovereign to the central bank. Under the law, central banks issue currency. So, you cannot have private entities issuing currency instruments because that will completely undermine and destroy macroeconomic and financial stability. Then there are concerns about money laundering, terror financing — things that India has taken a lot of steps to prevent. Besides, all these cryptocurrencies have the potential of being a Ponzi scheme. So long as people make money the celebrations will continue, but the moment prices crash gullible innocent investors will lose money. New technology is good, but new technology has to be utilised in areas that are useful for society. Our focus should be on utilising positive aspects of blockchain technology.
How do you see the role of RBI board — purely advisory seen earlier or a more effective one in shaping regulatory policies being debated some time back?
The RBI central board has been assigned certain roles and functions. All along in my experience, there have always been very free and frank discussions. This I am saying because I was a member of the central board even before becoming governor. Various suggestions made by individual members are taken very seriously by the RBI management, the government and deputy governors. That continues. Today the board is functioning very well. We have free and frank discussions in a very congenial atmosphere.
You have seen the RBI from the vantage point of North Block and now you are the governor. What is your view on the quality of the institution, staff?
It is top class. RBI is a very strong and robust institution. It is an institution of high integrity and a lot of domain knowledge. It compares with any other central bank internationally. It’s not that this is my view after coming to RBI. This has been my view even when I was in the government. My experience shows that the government always values the views and positions of the RBI. This is what I felt when in the government.
The RBI autonomy debate keeps cropping up. How do you view this?
As long as an authority is able to take decisions as per its assessment and after consultations with concerned stakeholders, autonomy of the authority and the institution is preserved. That is the principle on which RBI works. The RBI enjoys autonomy in its functioning and decision making.