Economy well-placed to deal with any spillover from external world: Das

"There are significant upside risks to inflation from geopolitical conflicts, geoeconomic fragmentation, climate-related concerns, and commodity prices going up"

In the first week of November, then Reserve Bank of India (RBI) Governor Shaktikanta Das refused to drop guard on inflation, citing significant upside risks, at the Business Standard BFSI Insight Summit. In an interaction with Tamal Bandyopadhyay, Consulting Editor, Business Standard, he also remained sanguine about growth.

 

Das’ six-year tenure as the RBI governor ended on December 10. Then revenue secretary, Sanjay Malhotra, succeeded him. Edited excerpts from a fireside chat with Das at the summit:

 

What will be the impact of US Presidential elections on India?

 

Two major international events are awaited by the markets — the outcome of the presidential elections in the US, and the fiscal policy support that the Chinese authorities are expected to announce. In an election, it's always prudent to wait till the entire counting process is over. Overall, the India-US relations have become much stronger. There's a strategic partnership between the two countries and that will continue, irrespective of who wins. The Indian economy and the Indian financial sector are today well-placed and very resilient to deal with any kind of spillover that comes from the external world. What is happening there (in the US), we are bystanders. We are watching. But when it comes to our domestic market, as a regulator, we are not bystanders.

 

The market was expecting a rate cut in December following the change in stance. However, you recently said it would be premature. How do we read your commentary?

 

Our communication has been very consistent. The change in stance gives us flexibility and optionality to decide the future course of action. The Monetary Policy Committee (MPC) felt that growth and inflation were now well-balanced and well-poised, and it was appropriate to change the stance.

 

However, there are significant upside risks to inflation from continuing geopolitical conflicts, geo-economic fragmentation, climate-related risks, and commodity prices going up.

 

The message was very clear that we have to be very cautious in our future course of action. It should not be assumed that we have done this, and the next course of action is a rate cut. A change in stance does not mean that the next step is a rate cut in the very next meeting. The next step has to be taken very carefully so far as inflation is concerned. I had said very clearly in my monetary policy statement that in September and October, the inflation prints are expected to be high. In September, the inflation print came in at 5.5 per cent. October inflation is again going to be very high, perhaps higher than the September number. We had warned this in our monetary policy statement. So, our communication is fairly consistent.

 

The RBI is sticking to its growth estimate despite tailwinds around growth. Is it time to actually take a relook at your growth estimate?

 

The International Monetary Fund (IMF), in its world economic outlook, has projected 7 per cent growth for India. So far as our economy is concerned, the data which is coming in is now mixed. (Among) the high-speed indicators that we monitor, which are around 70 to 80 indicators, I find that it is only the Index of Industrial Production (IIP) numbers and the FMCG sales in the urban sector that have considerably moderated. Other than that, the GST, e-way bills, toll collections, air passenger traffic, and the performance of the steel industry, cement sector, and automobile sector have been exceedingly well. The incoming data presents a mixed picture, but the positives outweigh the negatives. We are just beginning the second half of the current year. The first quarter growth was affected because of low government expenditure by both the Centre and states, perhaps because of the general elections. Also, in the first quarter, the subsidy payments by the state were very high, which also pulled down the GDP number.

 

The government expenditure has started picking up, with revenue and capital expenditure of the Centre and states, starting to see a rise. Subsidy outgo has gone up in the second quarter, which may have a negative impact on the GDP number.  

 

But down the line, economic activity remains robust. I would not rush to declare that the economy is slowing down. Whether I am optimistic or pessimistic is not an issue; I am just going by whatever evidence is available.

 

The RBI has recently barred 4 NBFCs from fresh lending. What is the regulator’s approach to this sector?

 

Out of 9,400 NBFCs, action has been taken against four. RBI's action is calibrated, and selective, and actions are taken in a very measured way. Every such action is not abrupt, or sudden. The action is preceded by months of direct bilateral engagement with the individual entities. We find certain serious deficiencies; it is pointed out to the institutions and we give them enough time to take corrective measures. In many cases, the corrective measures are taken and we don't take any action at all. The number of cases where we did not take action is actually much larger. That doesn't mean that there is something fundamentally wrong with our NBFC sector or the financial sector. On the whole, the financial sector, the NBFC sector at the system level remains very robust. It's only in a few cases where we do not see adequate action being taken or do not see action being taken at all, or action taken is not up to our expectations or is getting delayed; only in those cases do we take actions. The detailed reason for the action is always shared with the individual company. It's not as if they are kept in the dark. Our action is not punitive, but corrective.  It is good for the individual institution for its sustainability. It is good for the financial sector and, above everything; it is good for the consumer. All actions are taken in the consumer's interest. It (action) is not abrupt; it's not arbitrary. It’s measured action.

 

Do you think the banking sector is slightly overdoing on the credit front?

 

Our actions and approaches are nuanced. We don't have a view on whether the credit growth is high or low. It depends on the situation and the conditions prevailing at each bank. After Covid-19, there was a spurt in consumer demand for retail loans. Naturally, the banks will lend where there is opportunity. There are a couple of things that we always try to monitor: What is the underwriting standard of the banks and the NBFCs, and whether the underwriting standards are being diluted to push credit growth? In the banking sector, by and large, the underwriting standards have seen a considerable amount of improvement. The NBFC sector has also seen improvement but still, we find a few outliers where the underwriting standards need to be made more robust. So, at the system level, there is no issue.

 

We also look at the liability side of every banking entity…whether the deposit side is growing proportionately with credit growth because there has to be some correlation between them. We have not hardcoded any credit–deposit ratio for the banks. But this is something that every bank understands the CD ratio cannot be completely skewed. Therefore, on the liabilities side, we look at the composition to know if these are short-term borrowing to sustain a medium-term loan. We look at whether the composition of liabilities and assets is well balanced. The banks today are far more aware of the requirements on this. CD ratio at the system level is around 80 per cent, which is a considerable amount of improvement from what it was a few months ago. But there are some outliers here also, they are showing considerable improvement.  

 

Does your concern over unsecured loans stem from the fact that the money is ending up in the equity markets?

 

There is no hard data to establish that the money is going into the stock market. There is anecdotal evidence that money is going into the stock market. How much of it has gone into the stock market, it's very difficult to estimate. We did a quick sample survey internally and based on that, we have a broad sense of what's happening in that particular area. We have tried our best to quantify how much possibly could have gone to the stock markets but we cannot vouch for that figure. What is necessary is that the banks themselves need to look at the end use of the unsecured loans that they are extending. It is challenging for banks to ensure that the loans are being used for the intended purposes. Loans that are given for housing purposes or for some consumer durables, the end use can be monitored. But unsecured loans are open-ended and the end use is very difficult to monitor. But to the extent possible, there is a need for banks to try and monitor the end use of unsecured loans. We are very watchful of that segment. Overall, I do not see it as a major risk at the moment for the banking sector. But for individual institutions, the position may vary. We are monitoring it.

 

RBI launched a pilot on central bank digital currency (CBDC) in 2022. Has it taken off?

 

CBDC is a pilot project and is still in the experimentation phase. We never intended to roll it out from day one because we are dealing with currency. The safety, security, and robustness of the design are very important. It has also implications for monetary policy. There are learnings every day with regard to design features, possible use case; potentialities. We are in no great hurry to launch CBDC. When we are convinced, we will launch it. CBDC is very much there, new use cases are coming up every day.