Reserve Bank of India (RBI) Governor Shaktikanta Das refused to drop his guard on inflation, citing major upside risks while remaining sanguine on growth. In an interaction with Tamal Bandyopadhyay during the Business Standard BFSI Insight Summit, he said the Indian financial sector is resilient enough to deal with any spillover from the external world on a day markets turned volatile following the US election results. Edited excerpts:
What will the outcome of the US presidential election mean for India?
There are two major international events awaited by the markets — the outcome of the presidential election in the US, and the fiscal policy support expected to be announced by the Chinese authorities.
During an election, I think waiting until the entire counting process is complete is always prudent. I believe that, overall, India-US relations have become much stronger. There is a strategic partnership between the two countries that will continue irrespective of who wins.
The Indian economy and financial sector are now well-placed and very resilient in dealing with any kind of spillover coming from the external world. We are bystanders in what is happening there (in the US), but we are watching. However, when it comes to our domestic market, as a regulator, we are not bystanders.
More From This Section
Following the change in stance, the market was expecting a rate cut in December. However, in your recent commentary, you said a rate cut would be premature. How should 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. We changed the stance because the monetary policy committee felt that growth and inflation are now well-balanced and well-poised, making it appropriate to change the stance. However, there are major upside risks to inflation from continuing geopolitical conflicts, geo-economic fragmentation, climate-related risks, and rising commodity prices.
I believe the message was clear that we must be very cautious in our future course of action. It should not be assumed that because we have done this, 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 September and October inflation prints were expected to be high. In September, the inflation print came in at 5.5 per cent. October inflation is again expected to be very high, perhaps higher than the September number. We warned of this in our monetary policy statement, so our communication is fairly consistent.
The RBI is sticking to its growth estimate despite concerns about growth headwinds. Is it time to actually take a relook at your growth estimate?
The International Monetary Fund, in its World Economic Outlook, has projected 7 per cent growth for India. As far as our economy is concerned, the data coming in is now mixed. Among the high-speed indicators we monitor, around 70 to 80 indicators, I find that it is only the Index of Industrial Production (IIP) numbers and the fast-moving consumer goods sales in the urban sector that have considerably moderated.
Other than that, goods and services tax, e-way bills, toll collections, air passenger traffic, and the performance of the steel, cement, and automotive sectors have all been exceedingly strong. 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 by low government expenditure from both the Centre and states, perhaps because of the general elections. In the first quarter, state subsidy payments were also very high, which also pulled down the gross domestic product (GDP) number.
That said, government expenditure has started picking up — both revenue and capital expenditure of the Centre and states. Subsidy outgo increased in the second quarter, which may have a negative impact on the GDP number. However, economic activity remains robust down the line. The agriculture sector has done very well; kharif production is 6 per cent higher than last year, and the services sector is performing very well. Cumulatively this year, services exports have grown by about 14 per cent. Manufacturing IIP, which had dipped slightly in September, increased in October. Therefore, I would not rush to declare that the economy is slowing down. Whether I am optimistic or pessimistic is not the issue; I am just going by the evidence available.
RBI recently barred four non-banking financial companies (NBFCs) from fresh lending. What is the regulator’s approach to this sector?
Out of 9,400 NBFCs, action has been taken against only four. The RBI’s action is calibrated and selective, taken in a very measured way. Every action we take is not abrupt or sudden. It is preceded by months of direct bilateral engagement with the individual entities. When we find certain serious deficiencies, we point them out to the institutions and give them ample time to take corrective measures. In many cases, corrective measures are taken, and we don’t take any action at all. The number of cases in which we did not take action is much larger. This does not mean that there is something fundamentally wrong with our NBFC sector or the financial sector.
On the whole, the financial and NBFC sectors remain very robust. We only take action in cases where we do not see adequate action being taken, or where action is taken that is not up to our expectations or is delayed. We always share the detailed reasons for the action with the individual company.
Our action is not punitive but corrective. In a number of cases where we have taken actions, compliance has reached nearly 100 per cent within six months, and we then withdraw the restrictions if we are satisfied. This approach benefits the individual institution’s sustainability, the financial sector, and ultimately the consumer. Our actions are measured, not arbitrary.
Do you think that the banking sector is overextending itself on credit?
Our actions and approaches are nuanced. We don’t have a view on whether credit growth is high or low; it depends on each bank's situation and prevailing conditions. After Covid-19, there was a spike in consumer demand for retail loans, and naturally, banks will lend where there is opportunity. We always monitor a few things: the underwriting standards of banks and NBFCs, and whether these standards are being diluted to push credit growth.
In the banking sector, underwriting standards have seen considerable improvement by and large. In the NBFC sector, standards have also improved, though there are a few outliers where we feel underwriting standards need to be more robust. At the system level, there is no issue.
We also look at the liability side of each banking entity — whether deposit growth is proportional to credit growth. While we have not hardcoded a specific credit-deposit ratio (CDR) for banks, every bank understands that this ratio cannot be completely skewed. Therefore, we look at the liabilities side to see if short-term borrowing is sustaining a medium-term loan. The banks are more aware of these requirements today.
CDR at the system level is around 80 per cent, a considerable improvement from a few months ago. However, some outliers are still showing substantial improvement. Additionally, in underwriting standards, we see whether institutions, particularly NBFCs, have the bandwidth to sustain high credit growth and ensure that due diligence is not diluted. Whenever we see any issues building up, we engage with the banking entity to address them, and banks are responding positively to our regulatory and supervisory expectations.
Does your concern about unsecured loans stem from the possibility that the funds are ending up in equity markets?
There is no hard data to establish that unsecured loan funds are flowing into the stock market. Although there is anecdotal evidence, quantifying this is difficult to estimate. We did a quick internal sample survey to estimate the broad sense of funds going into the stock markets, but we cannot vouch for that figure. It is necessary for banks to assess the end use of unsecured loans they are extending, though it is challenging for them to ensure that the loans are being used for the intended purposes.
Loans for housing or consumer durables can be more closely monitored for their end use, but unsecured loans are more open-ended and the end use is difficult to monitor. Banks should try, as far as possible, to monitor the end use of these unsecured loans. We are watchful. For the banking sector overall, I do not view it as a major risk at the moment, although positions may vary for individual institutions. We are monitoring this closely.
The RBI launched the pilot for a central bank digital currency (CBDC) in 2022. Has it taken off?
The CBDC is still in its pilot stage and the experimentation phase. We never intended to roll it out from Day One, as we are dealing with currency, and the safety, security, and robustness of the design are crucial. The CBDC also has implications for monetary policy. There are daily learnings regarding design features and potential use cases. We are in no great hurry to launch CBDC. When we are convinced of the right time, we will launch it. CBDC is very much there, new use cases are coming up every day.
Catch all special coverage of the Business Standard BFSI Summit 2024 here: BS BFSI Summit 2024