In a nutshell, how would you describe the policy statement
I think this has been framed against a very positive background so far as monetary and external conditions are concerned. And the primary emphasis is to move forward with reform and to make credit delivery easier and to give confidence to the markets that the softer interest rate environment will remain. And if you see the nuances, this is much more direct than the cases you have seen for one year. That we just feel much more confident. Earlier the external uncertainties were greater. Today, we feel much more confident that we will be able to maintain the environment of positive liquidity, soft interest rates and external conditions will not require RBI to take recourse to monetary measures.
This policy is also devoid of dramatic steps....
This is part of a very conscious design. You see you cant avoid taking actions after a crisis, like we did after the Asian crisis when we had to take measures in response to a crisis. But monetary management and monetary policy has to be about not surprising the markets when conditions are stable.
On bank rate - we could easily have stopped without saying more than what we did. But we didnt stop there, we went further. This was expected by you. I make no mystery about it, that 0.5 per cent will be considered if and when suitable.
You have made it contingent on inflation. Apart from energy prices and fears of a war in Iraq, there is a concern that we have bottomed out on inflation...that there may be upward pressures. Do you see any such thing
If you take the average inflation, it is around 3.8-4 per cent. That we dont see changing as per our present expectations. What I am saying is that if the inflationary scenario remains comfortable as it is and if we see liquidity pressures - now lot of repo demand is there - money is coming into RBI. Supposing tomorrow a lot of money is being taken out of RBI and if call money rates go up, where you see a tightening of the conditions, then we would be able to reduce the rank rate.
The theme of transparency is something which comes across clearly in this policy. Not only for RBI, but also for the banks. Is that correct
Yes. I think this is the medium-term direction that we have to move in. One that monetary policy stance is that if conditions are good - and I believe that on the monetary side and the external side conditions are good - then the policy objective is to give the confidence, continuity, stability and progress towards financial reforms. And transparency. I think that is the best. If you talk to bankers, you will find there is no surprise here even for the bankers. You have talked about call money yourself. Because there is no reason for these things to be kept close to your chest and to reveal it one day! (Laughs)
Barring the surprise in the chart on spreads. Are you drawing attention to that
Some people have pointed that out also. So its worth putting all this information in the public domain.
So youre actually putting pressure on the banks...
I dont like the word pressure (smiles). What we are saying essentially - as you know that we feel sometimes autonomy can be taken too far. But by and large the direction in the regulations is that let the boards decide, let the banks work within the regulations. You have a more competitive environment. Now if you look at the spreads, they vary very widely. If bank A is charging this and bank B is charging that...and all of us make that choice for example in housing loans where today the system is quite transparent. We want it to be much more of that nature. Become competitive, prudential norms will be there so that banks cannot just start discounting shamelessly.
Should banks drop deposit rates
Well, yes. This question can only be answered if you have variable deposit rates. You know normally a banks asset liability management requires a six-monthly variable interest rate. But I should have the option, as a depositor, every six months to withdraw my deposit. And the fixed interest - if I want to have, say a five-year or a three-year deposit - you may need that option also, then the banks should charge a premium or a discount as in fact happens on the housing loans. That is what were trying to get at.
Should banks look at the pricing of their liabilities. Broadly
Yes, of course. The old era was different. When you had a planned framework and said that all these deposits belong to the public and the public would decide where they would go. Some of us older people have lived through that (smiles) period when the idea was you have savings and the Planning Commission decides where the savings would go.
Is the market geared for the flexibility which youre looking at for deposits
Not fully. Because of inadequate computerisation. You could have a system where some of the branches which are not computerised offer you only one product. Because interest rates cant be revised etc. And other branches which are computerised offer you other products. Or when the linkages start happening, then the problem would become simpler. But you are right. One, all branches of all banks are not computerised. Second, that our minds as depositors are not equipped to accept a floating rate. But what I am saying essentially is that a floating rate does not mean that I should accept a floating rate. I should still have the fixed rate option. That is most important. You must have a fixed rate option. The variable rate reset would also depend on whether you expect interest rates to move up or go down. Thats what we are trying to encourage, but its not something which cannot be done.
But youve said you want banks to do it fairly soon...
Yes. It is not that difficult also. You take savings account. Now most banks have introduced the sweep accounts. That is exactly the flexible rate.
On savings rate, theres no change. And the policy states there is no change..
Yes, savings rate is 4 per cent. So the effective rate is 3.4 per cent, which is not very high. We analysed this. Four-fifths of these are household accounts. And most of them are small accounts. So we didnt think that this was the right time. They are not large accounts, in rural and semi-urban areas, so we didnt think this was the time to change it, although in principle we say so, that there is a case for deregulation of even this rate.
Now that banks will declare maximum and minimum lending rates, what happens to the concept of sub-PLR
Thats it. What is the actual rate. The matter which is being brought up is you are allowed sub-PLR. So some people are getting sub-PLR. But when I go to the bank I am asked 15 per cent. What we have said here is that banks should say this is the range. My PLR is 11 per cent. My minimum rate is 6 per cent or whatever it is and the maximum I am charging is 16 per cent. Its very interesting. It varies a great deal.
Youve taken away the entire secrecy out of interest rates...
I think that is what we want to do. This is the absolutely correct practice. The effective rate should be declared. What is your range of rates should be declared. The basis should be known to you. If you are a person of good record, good standing, this is the kind of interest rate you will have to pay.
Do you see any oligopolistic practices emerging out of this
No. Not yet. But when information becomes more readily available, maybe. But I do not know.
RBI has come in for some criticism on supervision, particularly on co-operative banks. The policy makes no mention of this...
We didnt mention it because it isnt a policy issue. Now when something happens which is in violation of all RBI guidelines, you can certainly take the view that RBI should be the policeman. Some of you want the policeman or inspector to check everything. But if you look at the system, you have a few people who have violated all guidelines including the latest case. The view is that those violations should have been detected. Now how do you detect such violations Unless if I say every account that you do must be checked by me. Even then there may be violations. Like in the credit authorisation days there were equally bad scandals. So there is no point in dealing with an issue which is really not a policy issue.
Youve undertaken a slew of reforms of late. What kind of structural reforms are left on RBIs agenda in the immediate context
What is left is this whole mountain of NPAs. The recovery system, asset liability management, theres lots and lots left.
Is credit offtake going up
I should think so. In the last couple of months, there has been some activity.
Largely in agriculture
Yes, but agriculture should have a spin-off effect. Housing, construction, transport....
Youve done everything within your means and outside to ensure credit availability. What more can RBI do to take care of the growth effects
You see, so far as the growth effect goes, if you have on the infrastructure side we have a lot of money put up in the plans. Investments. If you have a burst of implementation on them, that itself will help. Projects which are half done, quarter done. Power plants are an example. Ports and roads. There has been positive developments on road projects. That would boost the corporate demand. You need to take the projects forward. The reality of our situation is that we are not able to spend on projects the money we have already allocated.
What is RBI doing about this mountain of NPAs
We are providing for it. So the net NPAs are coming down. Then there are the debt recovery tribunals. That we are also pushing for. Then corporate debt restructuring. One time settlements. Among the large NPAs, are many old NPAs, which are also stuck in the legal process. The textile industry...old, sick industries. RBI is ensuring the banks provide so that the balancesheet does not carry all these NPAs. Capitalisation norms. Consumer courts also.
Would you like to see banks cut lending rates now
I dont have a particular view on this. The banks have to decide.
The next six months are probably your last six months at RBI. Whats your agenda for this period
So far as things continue the way they are on our side of the fence, and industry picks up, wed just continue with the same process. The important thing is to revive credit demand and get it flowing.