RBI's priority is cleaning up banks, says Viral Acharya

RBI deputy governor said that demonetisation had led to a change in the way Indians saved

The cleaning up of banks’ books was the Reserve Bank of India’s (RBI’s)  priority, Viral Acharya, the bank’s deputy governor, said on Saturday.

Asked if cleaning up non-performing assets of banks took precedence over cutting interest rates for the RBI, Acharya replied, “That is our number one priority.” He was speaking on the sidelines of the Delhi Economics Conclave. 

According to the minutes of June meeting of the Monetary Policy Committee, Acharya maintained tolerance for a slightly higher rate of interest was justified to ensure that banks “do not find relatively low the hurdle rate for evergreening (perennial extension) of bad loans”.

“What is required for monetary policy to do its job better is to address the stress on bank (and highly indebted borrower) balance sheets,” Acharya had said. The MPC had held interest rates in that meeting, drawing criticism from the government.

Speaking at the conclave earlier, Acharya said demonetisation had led to a change in the way Indians saved. “Saving seems to have had a pretty non-linear shift since November and December. The flows that are going into mutual funds, structured investment programmes as a form of savings... if you look at insurance premium collections over seven or eight months, these are all massively on the rise,” Acharya said.

Speaking in the session, Harvard University Professor Kenneth Rogoff said India’s demonetisation held lessons on how not to carry out such an exercise. He said the time taken to withdraw high-denomination bills from circulation should be five-seven years. “India did this almost overnight,” he added.

“It takes six months to one year to print a new currency supply due to technical difficulties in producing counterfeit-resistant currency. India’s biggest problem was that it did not have nearly enough new notes on hand to exchange the old notes,” he pointed out.

Rogoff also said India should maintain a 4-5 per cent consumer-price inflation target. Headline retail inflation hit a record low of 1.54 per cent in June.