The difficulty in the current system is it personalises the policy too much. Which means you can make mistakes. Committees would be less prone to mistakes. Committees are less susceptible to pressure. The most important thing is that there is continuity in monetary policy. This is why we are trying to institutionalise the whole process...
Amid heightened controversy over a likely dilution of his powers, Reserve Bank of India governor Raghuram Rajan said he has reached an agreement with the government. Listing virtues of following a committee-based monetary policy, Rajan stopped short of explicitly stating whether he is in favour of not having veto power. On the troubled banking sector, he said the focus is on repairing balance sheets and that the stress from power distribution companies should be dealt with quickly. Excerpts:
Are you not in favour of the RBI governor having a veto power?
I think that the current system is effectively veto. The difficulty in the current system is it personalises the policy too much. Which means you can make mistakes. Committees would be less prone to mistakes. Committees are less susceptible to pressure. The most important thing is that there is continuity in monetary policy. This is why we are trying to institutionalise the whole process… You undermine the policy committee by insisting that the governor have a veto. Let’s not go into details here. We have reached a consensus with the government.
Do you believe the NPL numbers of banks or is the situation worse?
There are a number of checks and balances to ensure that the NPLs announced are the true and fair picture. We also supervise banks and go into their portfolio to see whether they have declared all their NPAs as they should.
The bank management is hauled up if there are any divergences. Going forward, I think the key question is how the stress plays out. The areas that are stressed are the power and steel sectors. We are certainly monitoring and trying to urge restructuring if it is done appropriately so that projects are put back on track.
How can the stress from the power distribution companies be handled?
The department of financial services secretary has said this situation cannot go on and we agree. The losses of around R13,000-14,000 crore in each of the big three states is going to lead to a debt problem quickly, if not already. So, this has to be dealt with. The first is to recognise that, in some sense, the forebearance didn’t work and we now need to move from a contingent action to upfront action. There needs to be evidence that action has been taken before any new lending is done.
Could there be a mid-cycle move from the RBI if it gets clarity over the various parameters listed in the policy statement?
We are awaiting information. We will take that into account and decide whether it warrants moving in between cycle. Generally in early stages of a turnaround in monetary policy, there is greater need to do that than at later stages. It is more reasonable to go back to a pattern. But nobody ever rules out actions in the central bank.
What would you say about the high real interest rate argument?
I see the real interest rate as 1.5% today, maybe lower. If you look at the seasonally adjusted momentum of inflation, we get 6.6%. You cannot add risk premia and say that is the real interest rate. If someone is borrowing at 14%, it includes his risk premia. If he was risk-free, he can borrow at 7.25%. You cannot attribute the risk spread to RBI. Real interest rates are barely positive after a long time. There has to be a balance between savers and borrowers.
The JLF system is clearly not working as some banks delay disbursements and undermine the process. What can the RBI do?
You have to be a little careful. On one hand, you want the deal to be completed,but on the other, you don’t want a bad deal. In some cases where the small banks dissent, they have genuine concerns about the nature of the account. We do not want to force anyone in.
But in other cases, they act as free riders. We have to make sure that we do not make it too easy to free ride and make it impossible to stay out the deal. We have done studies on JLFs and we have looked at the problems. We are examining options and we will come up very soon with the changes.