Interest rate would have been lower, but for fiscal deficit

Written by Shobhana Subramanian | Updated: Oct 26 2011, 08:14am hrs
As expected, the RBI raised policy rates by 25 basis points on Tuesday. Reserve Bank Governor Duvvuri Subbarao spoke to Shobhana Subramanian after the monetary policy review meeting.

Do you think the RBI has been compelled to play a bigger role in taming inflation because of fiscal profligacy

To some extent, that would be a fair assessment. As much as there is fiscal deficit and that is adding to demand, monetary tightening has to be that much more. If fiscal deficit had been lower, inflationary pressure would have been lower and monetary tightening would have probably been less.

Are you concerned about slowing capital flows because a fair amount of our reserves is funded by short-term money

Well, concerned is the wrong word. We keep monitoring the short-term flows and the short-term debt to total debt. And we are also watching the ability of our banking system to meet higher costs, short-term requirements.

Given that food inflation and the MSP are high, how do you see inflation coming down

A good kharif has certainly helped. But, as we have said several times, that theres inflation coming from protein-rich items. I am sure that our agriculture sector will respond to that. Perhaps, it takes slightly longer than a crop cycle to respond to a structural inflation like this but it should happen. The season-adjusted quarterly inflation momentum has turned down between June quarter and in September. Headline inflation can come down only if inflation momentum comes down.

High interest rates have hit the SME sector. Are you seeing the onset of a new NPL cycle

There are several stress factors, I admit. But if you look at the headline NPA number, which is the gross NPA between June 2010 and June 2011, in fact, there has been slight improvement in the margin. So, that number is reasonable. However, there are stress factors like high interest rate regime, inflation and growth moderating, asset quality coming under stress. We should be sensitive to them and I am sure that our banking supervision is addressing that problem on a bank-by-bank basis.

You had said that a fixed savings rate impedes monetary transmission. Is that one of the reasons why the savings rate has been deregulated

That certainly is one of the reasons, but not the main one, The main motivator has been that the large segments of low income households get reasonable rate of interest.

How do you view the imported inflation because of the depreciation of the rupee

Every factor that adds to inflation is a matter of concern. It's as much as rupee depreciating by about 10% between July and mid-October.

It has added to inflation. It has completely offset even the modest decline in commodity prices.

Are you worried about the economy and the problems in the US and Europe

What we want is a credible resolution of the problem in Eurozone that will satisfy the markets.

I am less worried than I was a month ago as I believe US will demonstrate it can resolve the problems there.