Indias external vulnerability higher than it was a year ago, says Subbarao

Written by Aparna Iyer | Shobhana Subramanian | Updated: May 4 2013, 07:37am hrs
D Subbarao has all along appeared to be more focused on taming inflation rather than supporting growth. On Friday the Reserve Bank of India (RBI) governor once again reiterated the risks to inflation, expressing concern on the current account deficit (CAD) and saying the vulnerability of the countrys external

sector was worse than it had been a year ago. Subbarao told FEs Aparna Iyer and Shobhana Subramanian after the monetary policy announcement that it was difficult to assess how soon and how much monetary transmission could take place following the policy rate cut. Edited excerpts:

Your estimate of how much transmission is possible in FY14

It is difficult to put a number or a time frame to it. Banks respond almost continuously over time and the transmission lag is up to two years. Banks have said that RBI must note that transmission takes place through base rate adjustment and also through spreads. Transmission is absolutely critical but there is a risk that if banks reduce deposit rates, people would opt for more of these informal schemes.

Will the RBI take comfort from the fact that transmission takes place through the debt market

I think we should not ignore that. In fact, even in the meeting with bankers I was told that transmission will take place through the corporate bond market and that later on, the rate cut will be transmitted through the banking system. What I want to say is that I will not be unhappy if transmission takes place through these.

Are prudential safeguards for exposure to unsecured debt adequate Is there a need to revisit the exposure norm of 15% to a single entity and 40% to a group

Yes, the guidelines seem to be fine. We have stretched ourselves to allow 40% in order to finance infrastructure. I believe that stretching it further would not be advisable. But, at this point, I believe there is no need to cut it back.

The government seems to be keen to raise the ceiling for FII investment in debt, currently at $76 billion. Is the RBI worried about this

I cannot really say whether I see room for further

relaxation. The limit has been relaxed quite substantially in the last few months. And the sub-limits have been collapsed. We had to this because we do have a large CAD.

But we still continue to believe that we need more stable flows and non-debt creating flows. I believe the government is working towards attracting more FDI.

What is your assessment of India's external sector position and the foreign exchange reserves cover

I would say that vulnerability indicators today are inferior to what they were a year ago on the external sector. And for obvious reasons. Last year we had a record CAD, this year it could come down but not substantially. Our external sector remains vulnerable and we will be cautious.

The RBIs GDP projection is lower than the government's and the inflation estimate too has been lowered. Why is the stance so heavily in favour of inflation and hawkish

Retail inflation is still high and that is the inflation that people see. The global situation is uncertain, as are commodity prices, though they may have softened. And we don't know how the exchange rate will move, so there may be imported inflation. There are implications from the performance of the monsoon and then comes the minimum support prices. Simply looking at the trend of falling inflation in the last six months and that it will come down in the first half of this year and believing that we have beaten inflation would be a mistake. That is the sense we want to give.

Now that we have reached within striking distance of the threshold of inflation, we must try and bring it down to that level. We don't want to compromise on the gains we have got from the sacrifice of the economy.

But the risks to growth you have stated like governance, clearances for projects, would take time. Does the economy have the wherewithal to wait for these corrections

We have known governance problems over the last two years. It is not that the government has not acted over the last one year. They have been acting. The cabinet committee on investment has taken important decisions and cleared investment. So that's important.

Do you see risks on the fiscal side as the government has an optimistic 6% GDP growth estimate

We have to see how it behaves. It is not just GDP going down, but revenues will also respond to that. Expenditure is quite inelastic, revenue will be tight on growth performance.