Budget has to be viewed as a package: Raghuram Rajan

Interview with Governor, Reserve Bank of India

In his interaction with the media after the monetary policy, Reserve Bank of India (RBI) Governor Raghuram Rajan spoke on a range of issues pertaining to the banking system and liquidity, but he did not want to discuss much about what the government should do in the Budget on February 29. Edited excerpts of other issues he touched upon:

On inflation
Since September, we have some information on Pay Commission awards and we have to see how it is implemented, who implements it, including the Centre and the state, and timings. We can look through some of its aspects, while some aspects we cannot. Broadly, I don't think it is fair to read that we have become more hawkish over time. Positives have been balanced by negatives. There has been some movement downward in oil prices. There are some risks which could also pull inflation down such as a good monsoon next year. There are some downside risks as well as upside risks.

On sale of assets to ARCs

We have had a discussion with ARCs (asset reconstruction companies) and some NBFCs (non-banking financial companies) on what role they could play in this process. We never tell banks that they must sell such and such assets, but we need to create capacity in the system to absorb asset sale if they happen. That is what we are actively engaged in. The ARCs mentioned some impediments in their access to capital. We are looking at that and working with the government to see if their capacity can be expanded.

On policy rate transmission
Marginal cost loan pricing, which will kick in from April 1, will actually help in transmission. It will be an improvement over the earlier base rate. Banks will move to that for new loans. I do believe that we will see a significant change in transmission process when that happens. So I have no doubts on that account. A number of banks actually welcomed the cleaning up of the balance sheets knowing that others are doing that also and they will not be seen in isolation. I believe this process will create the basis for strong growth as banks can then focus on not managing legacy assets but on lending to new ones. So it won't deter from profitability and growth.

On liquidity
Our measure of whether there is enough liquidity is to see whether call money markets are broadly in line with policy rate and evidence is that they are. Certainly the amount of lending we are doing in markets through facilities has increased to offset some of the shortages for a variety of reasons. But we are supplying that liquidity to the market. To argue that there is enormous liquidity shortage at this point is not consistent with the facts.

However, we also take a view on the difference between short-term liquidity needs because of seasonal build-ups of government balances and long-term liquidity needs which come from a need to expand RBI's balance sheet at a steady pace. We are looking into what those mean for the instruments we use.

On government cash balances impacting liquidity
I won't say there is any immediate effect, because we do tend to offset any increase in government balances through liquidity measures in the market. In that sense, we expect short-term fluctuations and we take measures to offset them. Auctioning government balances is one of them, but we also lend money into the market in such times. We do also think about what's the long-term liquidity needs of the economy are and obviously, we will adjust it appropriately.

On Budget
The Budget has to be viewed as a package always. Everybody including the markets are not looking at any one number, they are looking at the package.