After the third bi-monthly monetary policy committee (MPC) meeting, Reserve Bank of India (RBI) Governor Shaktikanta Das and other senior officials spoke to the media on the rate cut, transmission of interest rates and non-banking finance companies (NBFCs). Edited excerpts.
Why did the MPC decide on a 35 basis points (bps) rate cut, which is unusual?
Shaktikanta Das: There are precedents of advanced economies cutting rates by 10-15 bps. Given the evolving economic situation, and the assessment of MPC on growth, demand conditions, investment conditions, 25 bps cut was inadequate and 50 bps seemed a bit too much. So, a balanced call was taken.
Why would 50 bps be too much?
Das: In policy making you take a call. When you have to take a call, there is more than mere numbers. Numbers are paramount, what our assessment of the incoming data is, and how we see the incoming data. But finally when you take the decision, there is something beyond what is there in the data. Therefore, the MPC in its considered opinion took the view that 35 bps would be adequate.
What is the RBI’s view on GDP growth, which has come off sharply from 8 per cent four quarters ago to 5.8 per cent in the March quarter?
Das: Both demand and investment slowdown are having a dampening effect on growth. We have ourselves reduced our growth projections to 6.9 per cent with risks slightly to the downside. Our understanding is that, at this point, perhaps, this is a cyclical slowdown and not really a deep structural slowdown. Nonetheless, we have to recognise that there is room for certain structural reforms that need to be undertaken.
Why are banks not transmitting rate cuts faster?
Das: We had a meeting with public and private sector banks and the system is flush with liquidity. The rate cuts by the RBI and the liquidity, which we have injected, both have initiated the cycle of rate cuts so far in new loans from banks. We have a sense that there will be improvement. The RBI is monitoring it regularly and will not hesitate to take necessary steps to ensure faster transmission of rates.
Where do you see the recovery in growth being led from?
Das: You have to see the combined impact of the measures taken by the government and the RBI. Several measures were announced by the government in the Budget and by various ministries. We expect the government to take further necessary measures as may be required to deal with issues. This, coupled with rate cuts and the measure we have taken today, will see credit flow revive. So, growth numbers will pick up.
When will credit to NBFC sector start flowing?
Das: There are NBFCs with strong balance sheets that are able to access the market. Even today, there are NBFCs with solid balance sheets, are able to access commercial papers at rates which prevailed last July; which is pre-IL&FS. There are some NBFCs that are stressed because of various factors and credit flow has not happened to them. But then again, it is for banks to make their risk assessment and take their call.
Household sector savings are coming down while liabilities are going up. How concerned are you?
Michael Patra: The household sector remains the main supplier of funds to the rest of the economy. Yes, its liabilities are growing. However, its assets in the form of physical assets are also growing quite rapidly. Also, within the supply of funds, the composition is changing from pure deposits and currencies to mutual funds and shares.
Five payment banks have given up their licences. So, what is fundamentally wrong with the business model?
NS Vishwanathan: The payments banks applicants knew the business model based on which they applied for the licences. They made their own assessment and at that time thought there was space for so many banks to work. But now, based on their assessment of the business model, some of them found that it is not possible for them to pursue that idea and we are fine with that. Some of them want a change in the model. And our point is that, you applied for the licence with your eyes wide open. We cannot change the rules of the game midway.
While there is a lot of emphasis on transmission, why hasn’t the RBI yet mandated pricing based on external benchmarks?
Das: We do recognise that the banks are coming out of their NPA (non-performing assets) problem. Deposit growth has been slow. So administratively, we did not want to mandate it at that particular time. It’s better to allow market forces to play, and wherever regulatory interventions are required, the RBI will take necessary regulatory measures.
Can you give some idea on liquidity?
Das: The RBI is committed to ensure that sufficient liquidity is available, so that needs of all productive sectors of the economy are met. Towards this objective, the RBI will use its liquidity management instruments to ensure that the system’s requirement for day-to-day liquidity and durable liquidity are adequately provided.
Globally, we have seen central banks adding more gold, is the RBI also thinking along the same lines?
B P Kanungo: It is a normal central banking practice to diversify their asset portfolio, and add gold. And the RBI in the past has also added gold.
It is around 6 per cent of the total reserves...
Kanungo: There is no target in mind. We do it opportunistically, if we want to diversify our asset portfolio.
Given Indian firms’ track record on forex hedging in light of the ECB (External Commercial Borrowings) framework, aren’t you worried about a fresh currency risk from this easier rules?
Das: On ECBs, we have an overall limit of 6.5 per cent of the GDP. We constantly monitor it. As long as it is within that limit we do not perceive any extra risk.