"The Reserve Bank will not hold interest rates high any longer than is necessary, and if disinflation proceeds as warranted, there will eventually be room to cut rates," the Governor said in the customary post-policy meet. Raghuram Rajan Full Speech pdf
The Reserve Bank in the third bi-monthly review of the monetary policy left all the key policy rates unchanged citing inflationary pressure, but cut SLR by 0.50 per cent to 22 per cent which will release over Rs 40,000 crore liquidity into the system.
"There is a path we are trying to achieve, and we want to achieve that path (8 per cent CPI by next January and 6 per cent by January 2016). We are not against growth, but we do think that growth will be most benefited if we disinflate the economy," Rajan said, adding that both these targets look achievable.
"This is an anti-inflation fight, and let us win it because that will create the best conditions for sustainable growth," Rajan, who raised the key rates twice since assuming office last September, added.
Sounding confident of achieving the inflation targets, Rajan said: "I think the expectation that we will confront and deal with inflation is much stronger now than it was earlier."
The CPI inflation dropped to 7.31 per cent in June from 8.59 per cent in April.
Noting that foreign investors are worried over high inflation, he said one of the major concerns that investors have is whether RBI will take away the benefits of the Indian growth story from them by inflating economy and thereby depreciating the rupee.
"No, we have no intent of doing that. We want to bring inflation under control and more like the inflation in other countries so that the rupee is not seen on a continuously weakening path," Rajan said.
Stating that the country is no longer `a problem economy', Rajan said the economy has emerged from the perception of being in crisis as it has placed itself as a better place to remain invested.
"I keep telling the international fora that India is not a problem any more. I think there was a perception problem (last year), but I think today that perception also doesn't exist," Rajan said.
Noting that political stability is the best tool for macro stability, he said the formation of a stable government at the Centre has strengthened the country's position amongst overseas investors.
"Political stability to my mind is worth a tremendous amount as far as the external situation goes and that is big change," the Governor said, and complemented the government's resolve to keep a fiscal consolidation glide path.
When asked about the arrest of the state-owned Syndicate Bank Chairman S K Jain for allegedly taking bribes, Rajan warned against painting every state-run banker as corrupt and against a witch hunt which will bring credit market to a halt.
However, he admitted that such instances speak volumes about the poor corporate governance at PSBs and underlined the need for improving transparency in sanction of loans.
He also said the RBI has initiated inspection of the book of accounts of Syndicate Bank. "There is an inspection under way of Syndicate Bank but I think one has to be very careful about extrapolating this issue to entire banking system without thinking further through. This episode does raise the troubling issue," Rajan said.
"It is important for an enforcement agency to ensure full investigation is done. I think they are doing that...all the problem in the banking system is because of criminality rather than because of other factors.
"I think a balance has to be maintained and we have to be also careful. While we do thorough investigation and culprits are brought to book, it does not become a witch-hunt which then stalls the entire credit process," he said.
The RBI Governor also warned against the farm loan waiver calls from Chief Ministers of Andhra Pradesh and Telengana, running into close to Rs 1.3 lakh crore, saying the demand and hard facts are not matching.
Stating that there has been no major crop damage in the areas of Andhra and Telengana hit by the Phailin cyclone last year that merit a debt waiver, he came out strongly against "moral hazards" involved in such a promise.
"Because of a variety of factors, there was no emergency declared (by any district collector), no request for a restructuring was made and we had the full harvest coming in," Rajan said.
"We have been quite categorical about the dangers of talking about waivers, about putting the idea of waivers because it creates the possibility that anticipating such waivers, both the beneficiaries as well as others who think there is a chance of benefiting stop paying for fear that they will not benefit when the time comes," he said.
"We are in discussion with these states to see where exactly is the distress so that we can take a more reasoned and focused view. It doesn't appear from the production data that the cyclone had widespread damage," he added.
On the reasons for the second successive SLR cut, Rajan said the main reason is the government's commitment to fiscal consolidation has led him to cut the SLR. "Steadily, we want to reduce the statutory liquidity ratio consistent with the space that the government provides by rectifying its finances."
Terming the SLR as an "old obligation" which puts constraints on banks' balance-sheets, Rajan said it is important to reduce such mandated burdens to give banks a space to compete in a new economy.