Isn't the cut in cash reserve ratio (CRR) aimed primarily at ensuring the success of the government borrowing programme?
Let me explain the whole point. The objective is not solely to aid the government's demand for funds. The government demand is just a part of the entire gamut and the RBI takes into consideration the aggregate demand. Our objective is to see stable interest rates and that there is adequate liquidity in the system. Look at it this way: what would have happened had we not cut the CRR? If the government had to borrow and there was no liquidity in the system, the entire picture (of being able to maintain stable interest rates) would have been different.

There is a feeling that the government will overshoot the borrowing programme this year.
I cannot say anything at this point of time. It is for the government to decide. The finance minister has said in his speeches that he intends to rein in the fiscal deficit. So, we have to see the situation.

CRR is a drag on banks' profitability. When do you plan to bring down the CRR level to three per cent?
I agree that CRR is a drag on banks' profitability. It will have to be phased out but the RBI has not fixed any timeframe. Last year, around this time, when the inflation was high, we could not cut the CRR. Now that the inflation level is low and the macroeconomic fundamentals look strong we went for a CRR cut. We will continue to watch the situation and, as and when the demand for funds increases, there will be CRR cuts to infuse liquidity. But the macroeconomic signals should remain strong (to enable us to do that).

When do you plan to deregulate the savings bank deposit rate?
It is not one of those things which is a top priority with the RBI. We are having discussions with bankers on whether to free the rates or not. We have not reached any decision as yet.

You have said that banks are constrained to cut lending rates as their spreads are under pressure. Does that mean the job of the central bank is over by announcing the CRR cut?
The RBI does not have the powers in a deregulated environment to control banks' interest rates. The banks did cut their lending rates early this year...There are so many issues.

The banks are finding it difficult to bring down deposit rates as post office savings and certain other instruments offer higher rates. The government is aware of this.

When do you plan to implement the Verma Panel report on weak banks?
The RBI is examining the report from the supervisory and regulatory angles while the government is looking at it from a different perspective-the role of the owner. The critical issue is how to revive the three banks (Uco, UBI and Indian Bank) and make them viable. We should not look into the past...we have to make forward-looking policies to put these banks into shape. There are issues which have to be debated-like how much funds the government can pump in, the issue of rights of employees and the banks' overall interest. Some action has to be taken to speed up the timeframe... It may take one or two or even three years. The report has been made public and there has to be a debate before a decision is arrived at.

Will you consider a change in the management if it fails to deliver?
Certainly... the managements can be changed.

In that case, can't we delink the failure of a bank management from the failure of the financial system?
No, the systemic risk remains. Unlike in the west where you can change the management and have it replaced, in India the system is not all that flexible.

If a change in management is to take place, the question arises with what do we replace the outgoing management with. There is a problem here.

Since there is no move to allow corporates to set up banks, will you encourage large houses to acquire banks in the private sector?
The way the RBI is approaching the issue is on a case-by-case basis. Initially the idea was whether we could segregate the two activities (banking and corporate) of a large house and allow them to run a bank. A policy decision has been taken not to allow large houses into the banking sector for now...

But if there is a case where a bank in the private sector is looking for a buyer and a corporate is coming forward as a potential buyer, we will look into the case... The RBI will not identify the buyer...

What's the latest on the spat between Sebi and RBI? Who will regulate the private placement market in debt securities?
There is no spat between the two. The relationship between the two regulators is cordial. There are a few grey areas which are being looked into. Deputy governor YV Reddy is looking into these...

The Finance minister is talking about second generation reforms. Is the RBI ready to offload its stake in SBI?
If the SBI has to meet its capital adequacy requirements through an equity issue, then either the RBI pumps in money (in the form of rights issue subscription) or the bank should enter the market. If the RBI pumps in money, it would amount to monetisation...If the government subscribes to the issue, then the fiscal deficit will go up. So the best thing for the bank is to go the market. As a matter of policy, we are thinking that banks which are in good shape and desirous of raising capital, they should be allowed to access the market which will bring down the government stake. But the final decision in this regards rests on government and Parliament.

How do you visualise the Indian banking sector post-second generation reforms?
I expect that second generation reforms should usher in a sector where the supervisory system and the capital adequacy ratio (CAR) of banks are up to world standards.