)
Reserve Bank of India (RBI) Governor Raghuram Rajan says the central bank's objective is to move to a stable monetary policy, adding it is important to look through transient factors to adopt a policy stance. Edited excerpts from an interaction with researchers and analysts:
Is RBI moving towards targeting a term repo rate for the monetary policy mechanism?
We are trying to ensure the call money rate is close to the repo rate. Clearly, the call money rate will be affected by the amount of liquidity available in the market, and the amount of liquidity is affected by quantity of term repos we do. I presume the term repo rate will be close to the call money rate because of our intent to move close to the repo rate. In the term repo rate, there is a compensation for the maturity duration, which will make it slightly different from the overnight repo rate.
Won't reducing inflation to six per cent need additional tightening?
For about two years, we have been trying to achieve six per cent inflation. To that extent, we believe the time frame in which we plan to record this level of inflation gives us the opportunity to do it without much of a rise in interest rates. Obviously, government policies will help. For example, if the government is more circumspect on agricultural support as it was last year, it will help mute food price inflation. A good Budget, to the extent it builds confidence about the longer term fiscal health of the country and deals with longer-term inflationary pressures, will also quell inflationary expectations. There is a bunch of things that could help, but as I said in the policy, we are appropriately set given what we know.
What are the qualitative adjustments or support measures you will seek from the government to keep inflation low.
I did outline some measures that we think will be useful. Clearly, reduction in subsidies and perhaps, targeting more investments will help. To the extent that it does not increase overall short-run demand but increases longer-run supply, it will also be helpful on the inflationary front.
Will it be correct to say the interest rate movement is now largely focused on the six per cent Consumer Price Index (CPI) target for January?
Often, the monetary policy is intended to be as stable as possible. We should not react to every change. As we start the easing cycle, it should move to that direction, rather than ease for a little while and then tighten again. We will want to have a relatively stable monetary policy to the extent that we find a substantial amount of room builds up before the interim target is reached.
There was a stage when inflation was largely led by vegetable prices. Now, it is being stated other food inflation is rising, along with core inflation. Will interest rates remain high unless the CPI target is achieved?
We are trying to forecast what the CPI will be. We are setting interest rates with the idea that we achieve a certain level of the CPI at a particular point of time. This means we are willing to look through transient increases in the CPI or a transient decline in it. We are willing to look through these with a view of achieving the medium-term goal we have set. Interest rates will be set keeping that in mind.
RBI said the potential growth of the economy was about six per cent, possibly slightly lower. What is the need to cut rates and revive growth? Should the inflation trajectory be better than envisaged?
If disinflation is stronger - we anticipate this and believe we can meet the 2015 and 2016 goals in a smooth way - we will
certainly be prepared to cut interest rates.
Is RBI comfortable with India's reserves?
We have a lot of reserves. Right now, these are at about $300 billion. If you focus on reserves, there is no point when you feel safe. Until you get to Chinese levels, it is probably not enough. Our focus should be on creating a policy environment that gives investors confidence. On the financial front, at RBI, we are trying to provide this kind of confidence. This is a far better way. Historically, our interventions in exchange markets have been to reduce exchange rate volatility, not just the volatility today but also the anticipated volatility if the exchange rate becomes unduly strong in a short while because of extreme inflows or unduly weak because of extreme outflows. To the extent we have to intervene and prevent volatility, we have plenty of reserves.
What does RBI think about relaxation in gold imports, considering the stable currency and the narrowing current account deficit?
We have to slowly and steadily take action to remove some of these curbs. The precise timing of these actions will have to be discussed with the government. I think it will be useful for some of the big uncertainties facing us to be behind, rather than in front of us.
Many foreign banks are unclear about the wholly-owned subsidiary norms and a few aren't happy to enter through this route. How do you see the foreign-bank environment evolving in the near future? Do you see foreign banks acquiring private banks?
I don't think there is any lack of clarity on what they are supposed to do, both under the wholly-owned-subsidiary (WoS) structure and under current circumstances. Many of them are adopting a wait-and-watch approach till they are more confident. I think at some point, we will have to take a view, as a transformation to the WoS structure is not so much a move based on enhancing or reducing the profitability of foreign banks as a move to enhance the stability of the Indian financial system.
On whether they can take over private Indian banks, we have said we will take a look at that. Let them first move into subsidiaries and meet some of the obligations and responsibilities we put on Indian banks. As I said, once they do that, the intent is to give them as close to national treatment as we can.
