Public investment is important and the government is engaged in it: Raghuram Rajan
Reserve Bank of India Governor Raghuram Rajan said during his interaction with the media, immediately after announcing a status quo on policy rates.
On inflationary pressure Since September we have been receiving information on pay commission rewards and we have to see how it is implemented and who implements it between the centre and the state governments. There are some aspects of the pay commission that we can look through and some we cannot and over time we will be able to give you more information on that. So broadly it is not there to read that we have become more hawkish over time. I think broadly speaking the positives are balanced by the negatives. There has been some movement downward in oil prices but at the same time there are certain things that can pull inflation down like a good monsoon next year.
On fiscal targets Public investment is important and the government is engaged in it. On the issue of fiscal deficit it is not our work to tell the government what to do but we will see what it does and we will react accordingly.
Liquidity crisis in the current scenario We will have to see if the rates in the call money market are broadly in line with the policy rates and I think the evidence is that they are. We are supplying liquidity in the market. Thus to argue that there is an enormous shortage of liquidity in the market is not consistent with the facts. I can say that we will look at all liquidity needs and will use all the instruments available.
On G-Sec yields Government security yields are a confluence of a variety of factors but depend on when you start tracking the yields. If you look from the mid of 2014 for example, G-sec yields have come down significantly so what matters is how much policy cut was anticipated and how much actually happened. I think if there was some anticipation that had been already factored in the falling G-sec yields. Clearly the supply demand of g-sec at a time does have an effect so to that extent, issues of liquidity and issues of available purchasing institutions do matter.
Risks to the bond market With tightening policy across the world, yields have been picking up. You will find countries where yields have moved considerably more than in India. Our problem is it has not come down as much as we would like. It hasn’t moved up considerably. It is a risk we should be aware of. The role of somebody who tries to manage market stability is to warn about risks. It doesn’t mean risk will be realized and hopefully we will take enough actions so that risks remain remote possibility. It is a warning rather than saying it is imminent on us.
On liquidity We do tend to offset any increase in government balances through liquidity measures in the market. So, in that sense short term fluctuations we expect and we take measures to offset them. Auctioning government balances is one of them, but we also lend money in to the market at such times. We do also think about what the long term liquidity needs of the economy are and obviously we will adjust appropriately. It is important to distinguish between offsetting temporary fluctuations and imparting enough long term expansion of the RBI balance sheet and there is almost a one to one offset between any shortfall between government’s short term cash balances and what we do. I think the liquidity management has been adequate and we stand ready to do more and I think that is likely to happen as we reach the end of this fiscal year along with some window dressing by banks etc.
On loan pricing I believe that the marginal cost loan pricing which will kick in on April 1, will actually help transmission. And, I think it will be an improvement over the earlier base rate, as you know banks will move to that for new loans. And, I do believe that we will see a significant change in transmission process when that comes in. So, I have no doubts on that account. I think transmission will happen and eventually banks will be forced by competition to transmit.
Marginal cost pricing will impel banks over time to look at floating rate deposits and other new instruments but this is not something we will push them to. They have the freedom to do it even today.
On NPA issue We have discussed with banks a range of accounts and essentially given them some time to figure out whether those accounts are regularised or moved into different categories. The ball is now on banks’ court to move forward on it and our goal now is to make sure that this process is uniform across banks and over a period of time bank balance sheets are fully provisioned as well as the assets that could go bad are recognised as such and classified as such.
I think a number of banks actually welcome the ability to clean up their balance sheets knowing that others are doing that also and they will not be seen in isolation. I believe this process will create the basis for strong growth, as banks can then focus not on managing legacy assets but on lending to new ones. So, I don’t think that this will deter from profitability in the medium term as well as growth.
We should also be careful about treating any stressed asset as a total write off. Some of these assets need changes in conditions, sometimes change in terms of promoters, and could very well, over a period of time as the economy recovers, repays a fair amount of money.
On asset reconstruction companies We had a discussion with ARCs and some NBFCs on what role they could play in this process, we never tell banks they must sell such & such asset but we need to create capacity in the system to absorb asset sales if they happen. And that’s what we are actively engaged in. ARCs have mentioned some impediments in access to capital, we are looking into that and working with government to see their capacity can be expanded.