After policy move, hope bankers will set rates as per funding cost: Raghuram Rajan

Updated: Sep 21 2013, 15:13pm hrs
Raghuram RajanRaghuram Rajan has emphasised that the extraordinary liquidity measures taken to prop up the rupee will be gradually unwound.
In his maiden monetary policy statement, RBI governor Raghuram Rajan made it clear that the delay of the US Federal Reserves tapering of quantitative easing is just that, and RBI will prepare for the taper nevertheless. He further emphasised that the extraordinary liquidity measures taken to prop up the rupee will be gradually unwound and the policy framework normalised by making the repo rate the key indicator.

RBI has brought the focus back on inflation but are you looking at WPI (wholesale Price inflation) or CPI (consumer price inflation) and is there a bias on which one is more important

The RBI has always looked at both rates. We have to take everything into account because WPI for instance doesn't take into account a significant portion of services inflation. So you cant just focus on one. The RBI has historically focussed on a number of these and at certain points, the RBI has focused on one more than the others. But there is no permanent bias.

When you say LAF-MSF corridor will be reduced, does that mean that repo rate will have to rise and not just MSF being cut

I don't know. But, I can tell you almost surely MSF will do much of the walking. Remember, we have to wait and look at the economic conditions to determine what the next step will be. It can be two-way. So it could be that we walk more on the MSF side. At this point, I am entirely neutral on the next step.

What do you expect bankers to transmit from today's policy moves

I expect them to set rates appropriate to their cost of funding. I hope they will look at their cost of funding and how it has changed to make that decision, not look into the future and try and anticipate some hypothetical cost. I don't want to micromanage that process. The repo rate hike affects 0.5% of banks' funds and bulk of the funds cost will come down from 75 bps. So that should swamp any effect of the repo rate hike.

Will you eventually lift the other curbs on currency trading of the banks

I think we should let the markets stabilise and as they do we will take actions to reduce the constraints. First let the markets stabilise and then we can look at bringing offshore players and also allowing more freedom to the players here.

How do you define stability

We have to look at what we can be comfortable with. I see volatility having two effects, one in intraday movements, when they are large, it is problematic. And also unidirectional movements. The series of movements down and series of movements up, those are also a cause for worry.