RBI may start reversing policy stance from Dec: Rangarajan

The Reserve Bank of India (RBI) may start easing the tight monetary policy as early as from December, as inflation changes its trajectory, C Rangarajan, chairman of the Economic Advisory Council to the Prime Minister, said here on Saturday.

“It is expected that by December-January, we should see a decline in inflation, that may be the time when perhaps reversal of the policy (monetary policy) will become possible,” Rangarajan said on the sidelines of banking seminar Bancon 2011.

“As the inflation rate shows definite signs of a decline, the policy regime also has to change,” he said.

The central bank, which has raised key policy rates 13 times in 20 months, indicated in October it was through with the rate hikes and interest rates would be stable for some time.

“It would be fairly reasonable to predict this interest rate regime will extend for some time before we think of cutting rates. Inflation must come to more sustainable levels before we can think of reducing interest rates,” RBI governor D Subbarao said in post-policy interview to Business Standard.

Inflation has remained stubbornly high despite the series of rate hikes by the central bank. Inflation is hovering around the double-digit mark for the last 20 months. However, both RBI and Rangarajan expect inflation to start easing from December-January and come down to seven per cent by March. A cumulative rate tightening of 375 basis points since March 2010, however, has slowed economic growth. It also prompted the central bank to signal a pause.

Rangarajan, a former RBI governor, said the government should make all possible efforts to keep the fiscal deficit at the budgeted level and consider deregulation of petroleum prices once inflation starts slowing. “We cannot let domestic prices not reflect international crude prices,” he said.

BANKS’ CAPITAL NEEDS
Availability of capital may limit public sector banks' credit expansion in the coming years, Rangarajan said.

“Given, the current government policy of no stake dilution below 51 per cent, capital for public sector banks will have to come from the government budgets, banks' own resources and public issues. The availability of capital through budget sets a limit on the extent of expansion of credit by these banks."

The government has budgeted Rs 6,000 crore capital infusion in public sector banks in this financial year after injecting Rs 20,157 crore in 2010-11.

But Rangarajan feels the government will have to bring in Rs 4,000 crore -10,000 crore supplementary demands for grants to meet capital requirements of banks. “A long-term programme of injecting capital into public sector banks will have to be drawn up. Otherwise, the market share of public sector banks will have to come down and the slack will have to be taken by existing and new private sector banks,” he said. On Friday, Namo Narain Meena, minister of state for finance, said the government had approved Rs 14,000 crore capital infusion in state-run banks in 2011-12. Banks had asked for Rs 18,000 crore capital.

ASSET QUALITY
Rangarajan warned non-performing assets on banks' books might rise this financial year because of high interest rates and slow economic growth.

“The Indian banking system is also exposed to some sectors of the economy such as power and aviation, which are not doing well. Non-performing assets in these areas will need continuous watch by banks,” he said.

Banks should also be cautious of liquidity risks that may expand because mismatch in maturity of assets and liabilities. “Increased exposure to real estate and infrastructure will lengthen the maturity of bank assets.”

He added banks should improve bad loan recoveries and operational efficiencies, as deregulation of savings deposit rates, new capital rules and financial inclusion obligations would keep the lenders’ profitability under pressure.