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'My biggest concern is growth'

BS City Editor

Reserve Bank of India Governor Bimal Jalan admits candidly that the low interest regime has not covered the entire corporate sector.

The governor also says his biggest concern is growth. And yes, there are signs of a recovery.

But Jalan was quick to point out there were signs of a recovery last year too but that didn't take place. Excerpts from an exclusive interview with Business Standard:

What is your greatest concern?


How does the policy address this concern?

Whatever the policy can do, it has done. We have given an assurance that credit availability will be maintained. We are prepared to reduce interest rates and we expect the inflation rate to be benign. We also expect the external reserve situation to be stable. Then the credit delivery system must be addressed. We have told banks to lend to new areas in agriculture and to the small-scale industry.

Obviously, you don't see that as a solution?

Well, that may be true.

Are you asking banks to re-rate corporates and lend money at softer rates?

Let me explain. Monetary conditions, inflation, liquidity and external conditions are extremely positive. The idea behind the policy is to give assurance to the market that we will maintain the same outlook. One problem is that though the interest rates are soft, many corporates have not been able to take advantage of them. That is our feedback.

We have looked at the prime lending rates of banks and they vary. We want banks to be transparent. The track record of corporates needs to be looked into and not their size alone, while deciding on the rates of interest.

Have you tackled the problem of cooperative banks?

There is the issue of dual control in cooperative banks. A few of them transgressed guidelines. We have written to the government, suggesting a regulatory body for the cooperative sector. Now, it is up to the government.

Why do you think the fiscal deficits have not caused macro-economic problems?

In India, the fiscal deficit is not financed by sovereign bonds. Here domestic savings are financing it.

Then why are you concerned at the rising government debt?

(Laughs) When you are using domestic savings primarily for revenue expenditure and not for investments, domestic savings are giving you a lower rate of growth. Next, if domestic demand picks up, you will have the crowding-out effect.

But the argument is that as long as the government spends money, it does not matter how it spends it. It's a stimulant.

No, this theory has not worked. This argument is fallacious.

So, pump-priming is not the answer now.

Absolutely. There is no question about it. To my mind, pump-priming in the classical sense is to dig holes and to fill them. That will create demand.

So, what's the solution?

You have to create investment demand. It's not just a question of spending money. But if you build 1,000-km of roads instead of 500 km in a month, and build seven power stations instead of one, demand has to pick up.

Infrastrucuture spending is your answer?

I think it is of vital importance at the moment.

How far do banks affect your policies? Are you trying to protect banks' bottom lines?

What we have done is essentially taking reality as it is: that is, how much flexibility we have and the best we can do to enhance credit delivery and extend the area of bank finance to cover small-scale industry, agriculture, etc.

It was not that there was something I could do but did not do because that would hurt some banks.

That includes the issue of the bank rate. There is no need to cut it now but we will cut up to 50 basis points when it is required. The idea is to give as much assurance as possible and remove as much uncertainity as possible.

Are you rejecting the argument that there has been crowding out of private borrowing?

Yes, I am rejecting the argument as of now. There is no crowding out. If there is no demand, you don't see a problem of availability of funds. Look at the repo rates and call rates. Banks are putting money in 10-year government security at 7 per cent plus. I don't think anybody can establish that there is crowding out (of private borrowings).

Do you see any signs of a recovery?

As of today, given the low inflation and high foreign exchange reserves, the outlook is positive. Earlier, when the inflation rate went up, you tightened money supply and exchange rates became volatile.

Last year, the scenario was much more cautious. Now, the feeling is that the inflation outlook is good and the external front looks positive. We are giving an assurance that liquidity will not be a problem.

Do you see credit picking up? Otherwise, why have you cut the cash reserve ratio?

On the present expectations and taking into account the government borrowing programme, we feel that this Rs 50 billion -- which will be released by the CRR cut -- will be absorbed. Yes, there are signs of a recovery but we may be wrong as we were proved wrong last year...There is a demand pick-up...

The policy talks about deregulating interest rates on export credit in rupees.

It will be good, but given the present state of affairs in exports we decided to go slow. If exports increase and people start using cheaper foreign currency loans, we will consider this. This was one of the issues we wanted to flag.

You've had a sizeable inflow of foreign exchange. Where is this coming from?

It must be due to some confidence factor (smiles).

It's not linked to interest rates?

No, as you have seen forward premia rates have not changed much.

Has monetary policy has lost its relevance?

No. Monetary policy never loses its relevance..

What is your unfinished agenda?

The reforms. There are a whole host of issues. We have to move faster towards tighter prudential norms, bring down the cost of money, infuse competition. It's just begun.

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