Putting the ball in government’s court, Reserve Bank of India (RBI) Governor Raghuram Rajan today said future rate cuts would depend on the fiscal consolidation path in the upcoming Budget even as he rejected bankers’ call to extend the loan restructuring window beyond April 1.
“To build confidence in banks’ balance sheets, we have to come to an end of forbearance. We have to put banks on the right track. I do not think the answer is to pretend and extend or extend and pretend; it is to call spade a spade,” Rajan told reporters at the customary post-policy press meet.
On the vexed issue of bad assets and letting banks to increase their stake up to 30 percent in troubled companies, Rajan said the RBI and the Sebi will be reaching an agreement on the valuation side shortly so that banks take higher equity stakes in troubled companies and assets get back on track.
“Sebi is interested in protecting the rights of the minority shareholders and RBI is interested in making sure banks do not convert at too high a price and are given a fair value. The discussion with the Sebi is coming to some agreement and we will see within a short while it happens,” he said.
On the rupee, which has been gaining in recent months generating hopes of a rate cut, Rajan said: “We are perfectly comfortable where the rupee is.”
“But it is a risk which we have to keep in mind going forward with the massive amounts of quantitative easing going on in the rest of world,” Rajan said, adding that the RBI has intervened both ways in the market in recent weeks to curb volatility.
Strongly defending the the status quo on the policy front, the RBI Governor said, “Further action will be in the direction of rate cut that was initiated, and it will depend on the developments in particular on the fiscal front as well as a continuation of the disinflationary process.”
He indicated that the quality of fiscal consolidation, rather than the headline deficit numbers alone, will be important for him while undertaking any future rate cuts.
“It is not that we are locked to a specific number or a specific path, but it is the overall package, whether it makes for serious, high quality fiscal consolidation over time that clearly will impact the inflationary forces that we are most worried about. We will be looking at all aspects of the budget and they are eagerly awaited,” Rajan said.
However, he said he is confident that the government is focused on delivering a “solid Budget” and also said that Finance Minister Arun Jaitley has affirmed the government’s commitment to the ambitious 4.1 per cent fiscal deficit target for the current fiscal.
On impatience in the market and the industry, Rajan said monetary policy is a long-drawn process and a whole view should be taken on this.
“When we cut the interest rates it makes news for you, but it doesn’t do anything for the economy for three quarters. We need to take into account the whole view, knowing that we are steering a ship which moves fairly slowly,” Rajan said, adding.
The RBI will also be looking at the third quarter GDP data, which is due next Monday and emerging data on consumer price inflation, especially given the fact that there will be some rebasing in the numbers, he added.
On banks not lowering lending rates, he said if regulatory signals don’t make them cut rates, competition eventually will.
“I think it is the pressure of the competition which will eventually force banks to pass through these rate cuts. So, let us wait and see. It is not regulatory intervention… competition will force them…
“But the RBI is not the owner and is not in any way involved in the day-today running of banks. Rate cut is a decision which the management of banks have to take. So, we cannot nudge them to cut lending rates.”
He also noted that despite a fall in long-term interest rates, treasury rates and corporate bond rates, banks’ lending rates have remained flat.
It can be noted that after the January 15 surprise rate cuts, which came after nearly two years, only Union Bank and United Bank cut the rates.
“Of course, when you talk to banks they are very happy that we cut the rates. At some point my guess is that transmission has to take place,” Rajan added.
“Many have been quick to cut the deposit rates but not so quick to cut the lending rates. I presume some are hoping that they can get the spread for a little more time to repair their balance sheet,” he said.
On the impact of the hot money flowing into the country following the more easing by the ECB and Japan, Rajan said, “We are in a much better position now. Will we be immune for volatility, I think the answer is no. Everyone is affected by volatility.”
“But after the first wave of volatility when market participants stop to think, I am hopeful that we will look much better than perhaps competitive countries,” he added.
RBI Deputy Governor Urjit Patel said: “We are in the midst of the age of competitive depreciation and ‘beggar-thy-neighbour’ monetary policies (a policy through which one country attempts to remedy its its own problems by means that tend to worsen the economic problems of other countries)”.
On the spillover of effects of this competitive QE on the domestic economy, he said India is in a better position compared to last year to cope with the wave of quantitative easing.