“The guidance remains what it was when we cut rates, that further action will be in the direction that was initiated and that it will depend on developments, in particular on developments on the fiscal front as well as a continuation of the disinflationary process.”
Dr. Raghuram Rajan assumed charge as the 23rd Governor of the Reserve Bank of India on September 4, 2013. Prior to this, he was the Chief Economic Advisor, Ministry of Finance, Government of India and the Eric J. Gleacher Distinguished Service Professor of Finance at the University of Chicago’s Booth School. Between 2003 and 2006, Dr. Rajan was the Chief Economist and Director of Research at the International Monetary Fund. Dr. Rajan’s research interests are in banking, corporate finance, and economic development, especially the role finance plays in it. He has co-authored Saving Capitalism from the Capitalists with Luigi Zingales in 2003. He then wrote Fault Lines: How Hidden Fractures Still Threaten the World Economy, for which he was awarded the Financial Times-Goldman Sachs prize for best business book in 2010.
Anil Mascarenhas of IIFL gives you the highlights of the media conference post the RBI policy where Dr. Raghuram Rajan says, “The guidance remains what it was when we cut rates, that further action will be in the direction that was initiated and that it will depend on developments, in particular on developments on the fiscal front as well as a continuation of the disinflationary process.”
Steps and guidance
Dr. Rajan: Given that we cut rate off cycle and given there has been no significant new development on inflation in the fiscal front since then, we have maintained status quo on interest rates. However, we have taken actions in a number of other directions... Many of these actions are intended to further the growth process and some are intended to enhance stability of the system. In terms of guidance going forward, the guidance remains what it was when we cut rates, that further action will be in the direction that was initiated and that it will depend on developments, in particular on developments on the fiscal front as well as a continuation of the disinflationary process. So our further actions will be driven by the data.
Dr. Urjit R. Patel: We are in the midst of the age of competitive depreciation and ‘beggar thy neighbour’ monetary policy. As you know, the Swiss National Bank abandoned its peg, Singapore eased its Monetary Policy on January 28 and its currency fell to its lowest level since 2010, and Central Banks have intervened heavily in the bond markets bringing yields down to historic lows. This reminds one of an African saying that when elephants fight, the grass suffers. And the Economist says that the ECB and Bank of Japan are printing money and devaluing their currencies while the US economy is growing strongly; anyone who stands in the middle risks getting crushed. I think this forms an important backdrop of our macroeconomic management as we go forward and face these quite unusual challenges.
Following are Dr. Rajan’s views on a range of topics
The real rate
Between 1.5% and 2% is a reasonable real rate given where we are in the business cycle. Now of course different people have different views. Dr. Rangarajan would like to see it closer to 3. There are some people who would like to see it closer to 1, there are others who mix and match and add in various risk premia and claim that the policy rate is now way into real territory. So we have to be a little careful. What we would like is the real risk pre-policy rate to be about 1.5% to 2%.
New GDP series
We do need to spend more time understanding the GDP numbers and we will be watching February 9 releases with great care and delve in deeply into what we see there. At this point, it is premature to take a strong view based on these GDP numbers. Most of the data that we have seen for 2013-2014, except inflation which was very strong, give us a sense that there was lack in the economy. I think the chief economic advisor has pointed to the fact that imports, non-oil imports were coming down substantially, but there are other factors including for example auto production which is a fairly clean number which were coming down over this period. So we find it hard to see the economy as rollicking in 2013-2014. However, we must understand better why those numbers kick up and it could be that it is not manufacturing but services which were stronger during that time. One of the interesting factoids that you see is that India is moving more towards consumption of services, away from consumption of manufacturing. So it could play a bigger part in consumption but I do not want to say anything about the numbers till we understand them better. Let me say that our view will be formed only in part by numbers; it will be also other indicators that we look at on the strength of the economy.
Need to nudge banks?
The Reserve Bank is not the owner, is not in any way involved in the day-to-day running of the banks. That is a decision that the owners and management have to take. So we cannot nudge them. We can only comment on the fact that despite a fall in long-term interest rates, substantial fall, treasury rates have come down a significant amount over the last year and a half and corporate bond rates have also come down substantially. There has been some adjustment in rates but in general, base rates have not changed. Of course when you talk to banks, they are very happy that we cut rates. At some point, my guess is transmission has to take place so you have to look at that also.
A couple of banks have in fact cut their base rate. Some banks are I presume worried about the fact that if they cut their base rate, it impinges all borrowers, not just new ones. Given how weak credit growth for the banks has been and overall financing has been quite strong because they have gone out- large corporations are going outside the banks. I think banks at some point will have to start lending again and to get that lending they will have to be more competitive which means they will have to cut their base rate. Now we did revise our directions on how they calculate base rate to make it a little more transparent, but I am hopeful that it is a matter of time before banks judge that they should pass it on. Many have been relatively quick to cut their deposit rates but not so quick to cut their lending rates and I presume some are hoping that they can get the spread for a little more time to repair bank balance sheets. Eventually competition is what matters.
Forex market intervention
We do not intervene to try and target a particular level for the exchange rate. Where we do intervene is to reduce volatility and we have intervened in both directions in recent months and weeks, so we both buy and we sell. So it is not in any way an attempt to go one directional. I think we are perfectly comfortable with where the rupee is but it is a risk that we have to keep in mind going forward with the massive amounts of quantitative easing that are going on in the rest of the world that there are possible dangers of us becoming uncompetitive on that dimension.
Assessing changes in the fiscal space.
I think the Finance Minister as well as all the Ministry officials have reiterated their desire to stick to the budgetary target for this year, but also there is a lot of anticipation about the fiscal path over the next few years. It is not that we are locked to into a specific number or a specific path, but it is the overall package whether it makes for serious high quality fiscal consolidation over time that clearly will impact inflationary forces that we are most worried about. So it is all aspects of the budget that we will be looking at and that are eagerly awaited. I think the government has the intent of producing a solid budget.
Spillover of competitive quantitative easing
First, I am not sure that we know fully the process that Federal Reserve will follow. It will depend to some extent on developments on the dimensions that you talked about. As you know, the Federal Reserve introduced a phrase on the international situation in its statement this time. So I have no doubt that the exports as well as the part the dollar will play some role in their future deliberations. As far as India’s position goes, we have made important strides on at least three out of four macro variables and I am hopeful that the fourth we will also move. On growth we never plunged as low as some of our comparative countries. Of course if we take the new statistics that is there, we were already up to 6.9%. I do not want to over emphasize that because we need to understand that but that is one of the highest growth rates in the world. If we stick with our projection of 5.5%, we are still doing pretty well for this year. The second element that has improved considerably is our current account deficit which we project to be 1.3% this year and perhaps even lower next year because of the lower oil price, so long as it stays low. The third element has been inflation. After all investors are worried about the value of the rupee that has come down, considerably the inflation has come down which is one of the reasons the rupee has remained so stable. The fourth element is the fiscal deficit. We have made some strides there, some important strides and this is where the budget will be an important factor in establishing the continued confidence that our macro actions are all in the right direction. A secondary aspect which is important to help us is the build-up of reserves. Our reserves are substantially higher even net of forward positions which today are positive rather than negative last year and therefore I think we are in a much better position. Will we be immune from volatility, then the answer is no. I think everybody is affected by volatility but after the first wave of volatility when market participants stop to think, I am hopeful that we will look much better than perhaps comparative countries.
NPAs and revival
I think we should not attribute stigma to an NPA and this is a misconception that is both amongst producers as well as lenders. The producers think if their account is labelled NPA, it means they are at fault. It just means that account is not paying and there could be very legitimate reasons why it is not paying because of policy inaction, because of legal complications, etc. and accounts will stop paying or changes in world prices. So the fact that an account is an NPA is an accounting statement, it is not a statement about blame or reputation, etc., that is number one. Second, even an account which is an NPA, banks can lend to it and in fact with the new loans, so long as they are being serviced and there could be a moratorium on those new loans also, that loan is not considered an NPA. Our regulations do not label it an NPA. So projects that are halted because of their NPA can be restarted with new loans from the banks. There is nothing that prohibits that. What is important is the banks make a calculation that these new loans are necessary to restart the project and the package is going to be NPV positive for the banks because it has already made loans which are in trouble, the project needs to go forward to pay off, here it is a little more to ensure working capital needs are met or the final construction phase is done. That is okay and that is important actually at this time that in such situations they take a considered decision. I am not going to micro manage the decision from here but I am going to say if those loans are made, they are perfectly appropriate and they will not be considered NPA. In fact the rules say until fresh loans into an NPA situation are not necessarily NPA so long as they perform.
April 1 deadline for classification of restructuring accounts into NPA
It is important we clean up bank balance sheets that we show the bank sheets what they actually contain. That will enhance confidence in the bank balance sheets and enable the banks to raise the much needed fresh capital. In order to build confidence in bank balance sheets, we have to come to an end of forbearance that we have to put banks on the right track. We have given enormous amounts of new flexibility in trying to put distressed projects back on track. But I do not think the answer is to pretend and extend or extend and pretend. It is to call a spade a spade, do what is needed including making new loans if necessary to complete the project but move on beyond that.
Anil Mascarenhas of IIFL gives you the highlights of the media conference post the RBI policy where Dr. Raghuram Rajan says, “The guidance remains what it was when we cut rates, that further action will be in the direction that was initiated and that it will depend on developments, in particular on developments on the fiscal front as well as a continuation of the disinflationary process.”
Steps and guidance
Dr. Rajan: Given that we cut rate off cycle and given there has been no significant new development on inflation in the fiscal front since then, we have maintained status quo on interest rates. However, we have taken actions in a number of other directions... Many of these actions are intended to further the growth process and some are intended to enhance stability of the system. In terms of guidance going forward, the guidance remains what it was when we cut rates, that further action will be in the direction that was initiated and that it will depend on developments, in particular on developments on the fiscal front as well as a continuation of the disinflationary process. So our further actions will be driven by the data.
Dr. Urjit R. Patel: We are in the midst of the age of competitive depreciation and ‘beggar thy neighbour’ monetary policy. As you know, the Swiss National Bank abandoned its peg, Singapore eased its Monetary Policy on January 28 and its currency fell to its lowest level since 2010, and Central Banks have intervened heavily in the bond markets bringing yields down to historic lows. This reminds one of an African saying that when elephants fight, the grass suffers. And the Economist says that the ECB and Bank of Japan are printing money and devaluing their currencies while the US economy is growing strongly; anyone who stands in the middle risks getting crushed. I think this forms an important backdrop of our macroeconomic management as we go forward and face these quite unusual challenges.
Following are Dr. Rajan’s views on a range of topics
The real rate
Between 1.5% and 2% is a reasonable real rate given where we are in the business cycle. Now of course different people have different views. Dr. Rangarajan would like to see it closer to 3. There are some people who would like to see it closer to 1, there are others who mix and match and add in various risk premia and claim that the policy rate is now way into real territory. So we have to be a little careful. What we would like is the real risk pre-policy rate to be about 1.5% to 2%.
New GDP series
We do need to spend more time understanding the GDP numbers and we will be watching February 9 releases with great care and delve in deeply into what we see there. At this point, it is premature to take a strong view based on these GDP numbers. Most of the data that we have seen for 2013-2014, except inflation which was very strong, give us a sense that there was lack in the economy. I think the chief economic advisor has pointed to the fact that imports, non-oil imports were coming down substantially, but there are other factors including for example auto production which is a fairly clean number which were coming down over this period. So we find it hard to see the economy as rollicking in 2013-2014. However, we must understand better why those numbers kick up and it could be that it is not manufacturing but services which were stronger during that time. One of the interesting factoids that you see is that India is moving more towards consumption of services, away from consumption of manufacturing. So it could play a bigger part in consumption but I do not want to say anything about the numbers till we understand them better. Let me say that our view will be formed only in part by numbers; it will be also other indicators that we look at on the strength of the economy.
Need to nudge banks?
The Reserve Bank is not the owner, is not in any way involved in the day-to-day running of the banks. That is a decision that the owners and management have to take. So we cannot nudge them. We can only comment on the fact that despite a fall in long-term interest rates, substantial fall, treasury rates have come down a significant amount over the last year and a half and corporate bond rates have also come down substantially. There has been some adjustment in rates but in general, base rates have not changed. Of course when you talk to banks, they are very happy that we cut rates. At some point, my guess is transmission has to take place so you have to look at that also.
A couple of banks have in fact cut their base rate. Some banks are I presume worried about the fact that if they cut their base rate, it impinges all borrowers, not just new ones. Given how weak credit growth for the banks has been and overall financing has been quite strong because they have gone out- large corporations are going outside the banks. I think banks at some point will have to start lending again and to get that lending they will have to be more competitive which means they will have to cut their base rate. Now we did revise our directions on how they calculate base rate to make it a little more transparent, but I am hopeful that it is a matter of time before banks judge that they should pass it on. Many have been relatively quick to cut their deposit rates but not so quick to cut their lending rates and I presume some are hoping that they can get the spread for a little more time to repair bank balance sheets. Eventually competition is what matters.
Forex market intervention
We do not intervene to try and target a particular level for the exchange rate. Where we do intervene is to reduce volatility and we have intervened in both directions in recent months and weeks, so we both buy and we sell. So it is not in any way an attempt to go one directional. I think we are perfectly comfortable with where the rupee is but it is a risk that we have to keep in mind going forward with the massive amounts of quantitative easing that are going on in the rest of the world that there are possible dangers of us becoming uncompetitive on that dimension.
Assessing changes in the fiscal space.
I think the Finance Minister as well as all the Ministry officials have reiterated their desire to stick to the budgetary target for this year, but also there is a lot of anticipation about the fiscal path over the next few years. It is not that we are locked to into a specific number or a specific path, but it is the overall package whether it makes for serious high quality fiscal consolidation over time that clearly will impact inflationary forces that we are most worried about. So it is all aspects of the budget that we will be looking at and that are eagerly awaited. I think the government has the intent of producing a solid budget.
Spillover of competitive quantitative easing
First, I am not sure that we know fully the process that Federal Reserve will follow. It will depend to some extent on developments on the dimensions that you talked about. As you know, the Federal Reserve introduced a phrase on the international situation in its statement this time. So I have no doubt that the exports as well as the part the dollar will play some role in their future deliberations. As far as India’s position goes, we have made important strides on at least three out of four macro variables and I am hopeful that the fourth we will also move. On growth we never plunged as low as some of our comparative countries. Of course if we take the new statistics that is there, we were already up to 6.9%. I do not want to over emphasize that because we need to understand that but that is one of the highest growth rates in the world. If we stick with our projection of 5.5%, we are still doing pretty well for this year. The second element that has improved considerably is our current account deficit which we project to be 1.3% this year and perhaps even lower next year because of the lower oil price, so long as it stays low. The third element has been inflation. After all investors are worried about the value of the rupee that has come down, considerably the inflation has come down which is one of the reasons the rupee has remained so stable. The fourth element is the fiscal deficit. We have made some strides there, some important strides and this is where the budget will be an important factor in establishing the continued confidence that our macro actions are all in the right direction. A secondary aspect which is important to help us is the build-up of reserves. Our reserves are substantially higher even net of forward positions which today are positive rather than negative last year and therefore I think we are in a much better position. Will we be immune from volatility, then the answer is no. I think everybody is affected by volatility but after the first wave of volatility when market participants stop to think, I am hopeful that we will look much better than perhaps comparative countries.
NPAs and revival
I think we should not attribute stigma to an NPA and this is a misconception that is both amongst producers as well as lenders. The producers think if their account is labelled NPA, it means they are at fault. It just means that account is not paying and there could be very legitimate reasons why it is not paying because of policy inaction, because of legal complications, etc. and accounts will stop paying or changes in world prices. So the fact that an account is an NPA is an accounting statement, it is not a statement about blame or reputation, etc., that is number one. Second, even an account which is an NPA, banks can lend to it and in fact with the new loans, so long as they are being serviced and there could be a moratorium on those new loans also, that loan is not considered an NPA. Our regulations do not label it an NPA. So projects that are halted because of their NPA can be restarted with new loans from the banks. There is nothing that prohibits that. What is important is the banks make a calculation that these new loans are necessary to restart the project and the package is going to be NPV positive for the banks because it has already made loans which are in trouble, the project needs to go forward to pay off, here it is a little more to ensure working capital needs are met or the final construction phase is done. That is okay and that is important actually at this time that in such situations they take a considered decision. I am not going to micro manage the decision from here but I am going to say if those loans are made, they are perfectly appropriate and they will not be considered NPA. In fact the rules say until fresh loans into an NPA situation are not necessarily NPA so long as they perform.
April 1 deadline for classification of restructuring accounts into NPA
It is important we clean up bank balance sheets that we show the bank sheets what they actually contain. That will enhance confidence in the bank balance sheets and enable the banks to raise the much needed fresh capital. In order to build confidence in bank balance sheets, we have to come to an end of forbearance that we have to put banks on the right track. We have given enormous amounts of new flexibility in trying to put distressed projects back on track. But I do not think the answer is to pretend and extend or extend and pretend. It is to call a spade a spade, do what is needed including making new loans if necessary to complete the project but move on beyond that.
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