Interview with Subbarao: 'The disagreements need to be settled internally'

Q&A with RBI governor D Subbarao

Reserve Bank of India Governor D Subbarao said both the finance ministry and the central bank had shared goals and concerns. In an interview with Manojit Saha, he also said the fiscal roadmap announced on Monday was a good basis for the conduct of the monetary policy going forward. Edited excerpts:

Is there a disconnect between the finance ministry and the central bank over interest rate?

There is no disconnect. Both the government and RBI have shared goals and concerns, Both of us want high & stable growth and low & stable inflation. And we have our respective responsibilities. It is a question of timing. And I think that the government understands our concerns. We understand the government’s compulsions. 

Sometimes, the coordination is more visible, sometimes not. There will always be disagreements on certain issues, but we need to settle those internally.

Do you think the finance ministry’s fiscal roadmap plan announced yesterday is credible?

It’s certainly reassuring that the finance minister has indicated the fiscal trajectory not only for 2012-13 but for the medium term. He laid focus on expenditure compression, and he expects to realise the telecom revenues and disinvestment proceeds in full. Of course there is a lot of detail into it. We all know and understand how difficult it is to cut expenditure, especially in the short term. There is also a concern about the tax revenues -- whether they will be realised as per the Budget estimate. But the finance minister has better information than all of us; we need to go by what he says.  So I would say it is a good basis for the conduct of monetary policy going forward.

RBI expects inflation to come down from the fourth quarter. What are the factors that are giving this comfort?

One is that if commodity prices globally soften and if rupee appreciates, that would give us some comfort. There is an output gap now and should the supply response come, that will also reduce pressure on inflation. In addition to that, there is base effect. So with the factors from the real world and the statistical world, we expect inflation to soften in the fourth quarter, though it is difficult to say precisely when.

Are you suggesting a rate reduction in January?

Noting is certain. I cannot say on October 30 that I will do a rate cut on January 29. If that was possible, I would have done it today.  We expect that there is scope for further easing in the fourth quarter based on our current assessment of growth and inflation trajectories.

The liquidity tightness in the second half of October has been contributed by temporary factors like demand for currency in the festive season and lower government spending. But CRR is a long-term tool. Why have you decided to use CRR to address the liquidity issue caused by temporary factors?

Because we believe that liquidity constraints will persist for the next few months. And that is not temporary enough. Yes, there is festival demand and there are government balances building up, but there are also structural factors like the wedge between credit and deposit growth. And that wedge will persist for a little longer. Our intention in reducing the CRR today was to keep liquidity comfortable to ensure that there is flow of credit at the current interest rate regime.

Will open market operations continue even after the CRR cut?

I cannot say at this point in time. OMOs have been on the table and they remain on the table. If we think liquidity has become tight due to temporary reasons, we might resort to OMOs. We expect that with the easing that we have done today, should see us through the liquidity management.

Are you happy with monetary transmission, the way banks have responded to the earlier CRR cuts?

I cannot say whether I am happy or not. We would like transmission to take place. Some transmission has taken place. After the 25 bps CRR cut in September, there was 13 basis points reduction in the lending rates. We would like further transmission to take place.

Do you expect further softening of lending rates after today’s CRR cut?

Definitely.

You will be completing a five-year term next September. What are the two things you like to see?

I think we should be growing at 7%-plus next year. Inflation should come down. I am unable to say just now by how much. I would like to see at least these two parameters when I leave RBI.

So, you are saying 7% growth in 2013-14 is a possibility?

Of course it is very much in the realm of possibility but it will also depend on the global situation.