A day after leaving interest rates unchanged for the second time in as many months, RBI Governor Raghuram Rajan on Wednesday said interest rates are not holding back the economy.
He also maintained that RBI’s move to clean up balance sheets of banks is not aimed at reducing the risk-taking appetite of company owners.
“I do not think interest rates are what hold back the economy today,” Rajan, who had cut interest rate by 125 basis points, or 1.25 per cent, in 2015, but left them unchanged in December and yesterday’s bi-monthly policy review, told ET NOW.
He said there was “a time when people said I was nuts to even think of bringing inflation down below 6 per cent. They said I was subjecting the economy to severe stress. But all that is in the background now.”
In an apparent rejection of theory that slump in oil prices has helped bring down inflation, he said the government has “kept back” 75 per cent of the oil price bonanza through higher taxes.
“That means it is not oil prices. Yes, commodities have helped and government’s food management has helped too. But you should be gracious enough to give some credit where credit is due,” he said.
Inflation, he said, has come down largely according to the path that RBI set out.
Asked who should get the credit for the fall in inflation – commodity slide, the government’s food management and fiscal responsibility, or monetary policy, he said, “We can debate on that too.”
But what is more important lies in borrowing, he said. “Firms now seem to be very reluctant to take on credit. Banks have not, therefore, felt the need to pass through rate cuts to them. But savings also needed a big change. Remember, our household savings had fallen considerably, and even now they are not at a point where we are comfortable.”
Rajan said RBI uses “appropriate” instruments, including open market operations to infuse long-term liquidity, whenever needed.
“When there is a need for short-term liquidity which happens, for example, when government balances build up we resort to short-term instruments,” he said.
Yesterday’s government announcement to buy back Rs 20,000 crore worth of bonds is part of liquidity easing as it would mean money is flowing into the system on a permanent basis.
“We have no intention of keeping liquidity tighter. In fact, we have supplied through various instruments whatever the market is looking for. But our longer-term instruments are not fully subscribed to yet even though they are available,” he said.