The RBI on Tuesday decided to keep key interest rates unchanged, indicating that there may not be reasons for further hikes if inflation continued its trajectory downwards. In a media interaction, governor Raghuram Rajan, however, expressed concerns over growth.
You have not talked about open-market operations. As the borrowing programme starts this week, what will be your policy towards supporting it?
The intent is to provide sufficient liquidity to the markets. That means both short-term liquidity ? consistent with maintaining the call money rates close to the policy rate ? and providing long-term increases in the balance sheet of the RBI ? consistent with what, we believe, is the appropriate rate of growth of credit in the economy. Now, our focus is on the rate of credit, consistent with the inflation that we are looking at, as well as the economic growth we anticipate. To that extent, OMOs as well as foreign currency asset purchases are consistent with that and, over the next year, we will accommodate what we can. We believe the potential output has fallen from 8.5% in fiscal year 2011-12 to just below 6% currently. This has been corroborated by other research also.
You have talked about expected El Nino effects on food inflation. What could be their impact?
Firstly, it is not a given that an El Nino will happen. If it does happen, it is not a given that food production will plummet. If food production does plummet, it?s not a given that inflation will be high across the board. It depends on which commodities, in particular, are affected. There are a lot of uncertainties in this chain of thought and, therefore, I don?t think we can anticipate, at this point, what will happen. If food prices do increase, there is a question of whether we see it as a short-term transient increase ? like we saw with vegetable prices in December ? or whether it is a more permanent increase. So, we will have to take a call then.
As far as the Budget outlook goes, we have essentially a vote-on account right now. Clearly, the new government will have to announce a full Budget and, presumably, that will take into account the need to meet the fiscal consolidation cause. A number of measures will have to be looked at and we should wait for that before taking a call on the Budget being right or wrong.
What is the time-frame for the differential and on-tap licences which the RBI had proposed?
The point is that we should not be giving licences every 10 years; I think there is scope for having people with partial licences, only for payments or for lending, to come into the system. This will allow for developing banking capabilities even with relatively small-size corporations, which will, perhaps, allow them to apply for full banking licences down the line. To facilitate and expand entry, we need to look at both on-tap licences and differentiated licences.
We already have a base document; we have to look at it more closely. I would expect a framework in the next few months to develop and, then, the process to start soon after. It would take some time for the people to apply and applicants to be vetted. What we have learned this time is how to do it carefully and that would be part of the process going forward. I can?t give you a date, but we hope to open the window quite soon. Maybe, we will do it first for differentiated licences and, then, move on to on-tap universal banks.
Giving licences is a regulatory process, not a governmental one. The notion of asking the Election Commission for its permission was primarily because this is the election season and we didn?t want the potential licencees to get their approvals under a cloud. I think once they say that there is no issue there, we would be in a position to announce the licences fairly quickly.
You have warned against window dressing by banks at the end of each year. Please elaborate.
What happens towards the end of the year is that banks are trying to build a certain kind of balance sheet for a variety of reasons. Some want to reduce the size of their risk-weighted assets to qualify for lower capital requirements, others want to increase the size of their assets to meet government performance requirements. But what you see is that these incentive distortions do affect a variety of markets.
For example, the certificate of deposits market became very tight in February itself and we took some pre-emptive actions to improve liquidity. In the longer term, we do not think that RBI should be in the business of bailing out the banking system, when the system itself is creating its problems. So, we have to change the structure and we are thinking of a variety of ways. We will discuss with the bankers on how to better improve liquidity in the year-end.
You have also talked about the re-repo of government securities. Is it something that you expect will lead to a term money curve in the long run?
The idea of re-hypothecation typically works not so much with term repo, but reverse repo. When somebody has lent us money and, suddenly, feels that they have a squeeze on their reserves and want to re-lend it to someone else, re-hypothecation allows that. As we move to term reverse repo, this would be a helpful thing. We are exploring it and we think we can do it without much risk. Of course, during the financial crisis, there was re-re-re-re-hypothecation and that created problems because nobody knew who it was hypothecated to. We can control that. Once we satisfy the internal discussion on how to do it, we will move ahead.