With inflation under control, RBI may go easy on rates: Rajan

RBI should not be in the business of bailing out the banking system with infusion of liquidity when the banking system is creating its own problems, rues RBI Governor Raghuram Rajan.

Speaking to the media after the central bank’s monetary policy review, Reserve Bank of India Governor Raghuram Rajan said, in an election year, it is better to be ready for any eventuality.

Edited excerpts:

Policy stance

RBI’s policy stance will be firmly focused on keeping the economy on a disinflationary glide path, intended at eight per cent Consumer Price Index inflation by January 2015 and six per cent by January 2016.

Currently, it is appropriate to hold the policy rate, while allowing the rate increases undertaken during September 2013-January 2014 to work their way through the economy.

Further, if inflation continues along the intended glide path, further policy tightening in the near term is not anticipated.

I hope the only thing surprising about the monetary policy is the lack of surprise.

I am glad financial markets and analysts have understood what we are doing.

. . .

Liquidity

I think the intent is to provide sufficient liquidity to markets -- both short-term liquidity, consistent with maintaining the call money rate close to policy rate, and providing long-term increases in RBI’s balance sheet, consistent with appropriate growth of credit in the economy.

Now, our focus is on a rate of credit consistent with the inflation we are looking at and the economic growth we anticipate.

To the extent open market operations and asset purchases are consistent with that through the next year, we’ll accommodate what we can.

. . .

Potential growth

My concept of potential growth is somewhat nebulous -- to an extent, the supply constraints in the economy will have an effect on potential growth to the extent supply constraints are alleviated through, for instance political action that could enhance potential growth in a relatively short time.

In that sense, I do not think when we talk of potential growth, we are talking of the structural growth prospects of the economy, which could be quite different, given our population, etc, provided supply constraint issues are addressed.

. . .

Impact of El Nino

On food prices, it isn’t a given that the impact of the El Nino will be seen.

Conditional on the El Nino, it isn’t a given that food production will plummet.

If it does, it isn’t a given that inflation will be high across the board.

So, there is lot of uncertainty, and what will happen cannot be anticipated.

. . .

Government action

As far as the Budget outlook goes, we have a vote on account right now.

Clearly, the new government will have to announce a new Budget and that’ll take into account the need for a fiscal consolidation path.

I think a number of measures will have to be looked at; we have to wait for that.

. . .

On differentiated and on-tap banking licences

The point is, we shouldn’t be giving licences every 10 years.

Also, there is scope for having people with partial licences -- only for payments or lending -- to come into the system.

This will allow people to have banking capabilities with a relatively smaller size, which will allow them to apply for full banking licences down the line.

A framework will be developed in the next few months and then, the process will start soon after. It takes some time for applications to be vetted.

What we have learnt this time is how to do the vetting carefully and that will be part of the process.

I can’t give you a date; I can only say we hope to open the window quite soon.

We might open the window for differentiated licences and then move to open the on-tap for universal licences.

. . .

Window dressing

What happens towards the end of a year is banks try to build a certain kind of balance sheet.

For example, the CD (certificates of deposit) market became very tight in February. So, we took some preemptive action to improve liquidity.

But in the long term, we think RBI should not be in the business of bailing out the banking system with infusion of liquidity when the banking system is creating its own problems.

We have to change the incentive structure and we are thinking of a variety of ways. We will discuss with bankers how we can improve liquidity towards the year-end.

The year-end should not be a time for anything special to happen; it should be smooth.

. . .

The next government

Clearly, markets are anticipating a stable government and rapid policy action.

To the extent markets are disappointed, it will reflect on stocks, perhaps on bond markets and exchange markets.

We have to be prepared for some turmoil.

If the government isn’t stable, provided any new structure shows appropriate concerns about the economy, fiscal conditions, etc, I suspect after an initial bout of turmoil, there might be reassessment, which will be positive.

Let us wait and see.

We have to be prepared for eventualities.