‘I don’t think we were excessively aggressive’

RBI governor Raghuram Rajan believes Tuesday’s deeper 50-bps cut in repo rate will stimulate investment at a time when weak external factors could impinge on domestic demand. But Rajan is not ready to let up the guard on retail inflation although he has set a lower inflation target of 4.8% for 2016-17, which he thinks is feasible. For any further easing, banks will have to transmit the cumulative 125-bps cut in policy rates so far and Rajan is confident that transmission will happen. Fixing public sector banks’ balance sheets and boards is very much on the agenda, Rajan said in his interaction with the media and economists.

You have stressed on transmission. How much transmission are you looking at?

We are going to be working very hard with the government. The intent is to not point fingers at other people but to start moving quickly and ensuring that transmission starts taking place. Of course, there are limits to how fast it can happen. But we believe that some will take place very soon and more will take place over time. We want to create conditions, some of which are changes in calculation of base rate, and also include government action such as reviewing small savings scheme. I must say that some transmission has already taken place through markets.

Will future rate cuts depend only on transmission and what weight will the Fed’s hike have in the decision?

We clearly pay attention to what the Fed is doing as well as other central banks because it does affect our economy. But I can’t say this is a central issue that we focus on. This is one of the many. As far as transmission goes, we want to encourage faster transmission and we will do what is needed. What we need to look at is that we have greater comfort on the inflation path.

What made you cut by a deeper 50 bps?

The policy is very clear that since our last statement the conditions we had set out have been broadly met, barring the monsoon. But we have not seen food prices go up. We have also seen a dramatic reduction in the external environment, including the news on China, which has had a tremendous effect on commodity prices and prospects of these prices.

There is a general sense that global activity is going to be further downgraded. That gave us a sense that we probably could look for a little more room given that global conditions could impinge on domestic demand. The capacity utilisation is very tepid and that would suggest the room for more domestic demand, which would be non-inflationary. We need to restart investment. Investment intentions have not picked up yet. We used what room we had and I don’t think we were excessively aggressive.

What is your basis for FY17 forecast of 8% growth and 4.8% inflation?

The output gap is still negative, so I don’t think this is a necessarily a breaking tension between the projection for output at GVA and inflation. Secondly, as we enter a period of persistently lower inflation, the opposite of what was the case for several years prior to the current disinflationary cycle, the impact of those on inflation itself will, I think, for the first time, be felt on the downward side. Global commodity prices are still expected to be soft and, therefore, that particular beneficial factor is likely to continue even as we grow somewhat faster.

How much is the worry on power discoms because a large part of hindrance for banks to transmit rate cuts is having exposure to them?

The government, of course, is fully cognizant of the problem and we do not intend to hit the can down the road as perhaps has been the unintentional outcome of policies so far. We need to take a very careful decision here to put the power discoms back on track with healthy capital structures and absorb the debt that has been created over time in the right pace with the right interest rates. Hopefully, we will get a resolution, which will help the power discoms to look ahead. Obviously, there will be several contingencies in the final resolution.

In RBI’s assessment, are PSU banks on track to achieving capital adequacy under Basel-III?

I think there is a game plan that the government has for the process of raising capital in public sector banks. Step one is to improve the governance structure of the banks. Step two is cleaning up the balance sheets, which we are engaged in currently after which comes raising capital at favourable prices. We are working our way through step one and two. We need to do more on bank boards and professionalisation of them. Government has indicated its desire not to intervene as perhaps was done in the past and to make banks more independent. I think this combination of actions over time will allow them to raise capital to meet their needs of Basel-III.