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It’s a cordial relationship with government: Raghuram Rajan

During the post policy interacting with the media, Reserve Bank of India (RBI) governor Raghuram Rajan explains the rationale for the policy stance and several others issues: Edited excerpts:  

Pressure from govt to cut rate

(Laughs) The word pressure is perhaps misused. I think there is a healthy dialogue that goes on. Obviously the finance ministry internalizes the concerns of inflation and recognizes that we are entrusted with the task of controlling inflation and creating sustainable growth. We are not combatants but we are on the same side. Sometimes they have different views and we try to persuade each other of those view. I think the finance minister has said publicly a number of times that ‘these are my views but ultimately the decision is RBI’s.’

We are very respectful of the views of the government and we try and accommodate these views to the extent we can and then we explain where we can’t and why we can’t. And I think it’s a cordial relationship and its being on every facet whether it is on monetary policy or on things like debt restructuring so on.

Why status quo

We want to make sure that this process is well underway. We have couple of months after four-and-a-half to five year of high inflation. So we are going to make sure that this is for real especially because we don’t intend to flip flop. Again if the world changes dramatically or circumstances change dramatically we will have to respond. We don’t want to follow every piece of information up and down. We rather change and change for good.

Banks not cutting rates

Even though rates have come down, banks have not passed it on. The transmission process is still not working as significantly and therefore one would imagine that a fall in short term rates have not been passed through and additional rate cut is only a mild chance. I would believe that there is a signalling effect. I would believe that when banks are confident that rates would come down and stay down, they may start passing through more. For us to reach that point will signal very strongly about interest rates. Today is premature but I have laid out the condition where we think we will be in a position to move.

Bond yields falling in anticipation of deep rate cut

I don’t think I was trying to signal the magnitude of any action. What I was saying is that once policy turns, it will not up and down, rather one will have a sense that it is in a particular direction. The size of any action is still contingent on data and so on, but the direction will be uniform. The sequence of moves will be on consistent direction.

Scrapping 80:20 rule on gold imports

We have said in the past that over time some of actions that were put in place to deal with the currency volatility that we experience last summer will be withdrawn. For example, we have increased the limit under Liberalized Remittance Scheme (after the currency stabilised).

On payment banks and small finance banks

I don’t have a number (on how many licences will be granted), we will have two expert committees which will look into it and give us a set of candidates. We will go through that also. My guess is it could be certainly more than two. We need to ensure that there are a variety of participants. I think imply reasonable number. This will be a full-fledged licensing process and hopefully we will get enough applicants.

Banks to be allowed to have higher equity in debt recast

This is something which banks across the world including banks in India do. Banks in India have asked for this as a way of giving greater flexibility. Equity is a form of upside. The key issue that the transaction is done at a fair price so that the banks are not overpaying and at the same time the minority shareholders don’t get a raw deal. This is what we are discussing with SEBI on how to contour that. It does not mean banks will take equity in every situation. In some situations they may prefer not to. But this is giving banks more flexibility.

Steps to improve NPA recovery

If we can speed up the judicial process especially the Debt Recovery Tribunals (DRTs), I think it will help to bring down some of these risk premiums.  So we need to make sure that DRTs work better, making sure that there is no excess number of appeals. Finance ministry has already talked about expanding the number of DRTs. We are working with the ministry to make sure that happens.


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