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The RBI Governor, Dr D. Subbarao, laughs away any imputation that he cut rates under Government pressure.
He is categorical in saying that it was RBI's own judgment that rates could be cut. He also cheerfully admits to having no shortage of advice on how to run the economy of a billion plus people.
He is hopeful that the impact of today's rate cut coupled with CRR cuts in the past few months would result in banks lowering interest rates in due course.
He says that liquidity is going to be more comfortable than last year and banks' pricing power will be reduced to that extent. In a short interview a few hours after he unveiled his annual monetary policy, the RBI Governor tackled a few questions with customary aplomb.
Excerpts from the interview:
The average amount required for redemption of government loans during the next few years is around Rs 1.5-lakh crore per year. And if we take fiscal deficit as a proxy for borrowing it would mean another Rs 4.5-lakh crore per year. Given the magnitude of expected government borrowing (at least Rs 6-lakh crore every year), won't this be a strain on the RBI? Can you continue to do the level of open market operations to support higher government borrowings?
Open market operations or cuts in cash reserve ratio are motivated by liquidity management considerations and not to support government borrowing programmes as such.
Yes, the level of gross borrowing by government is significantly higher than the net borrowing. Therefore, there will be pressure. But compared to last year, we are hoping that the Government will not increase the borrowing requirement during the course of the year. We hope that the fiscal deficit will be at the levels projected.
Our M3 projections and non-food credit growth projections will take care of the requirements of both the Government and the private sector.
The Government has tabled in the Lok Sabha a Bill for setting up an independent Public Debt Management Agency to resolve the conflict of interest in RBI handling the subject. If the Bank continues to buy back securities to help in the successful floatation of new government bonds would it not defeat the purpose for which the agency is being set up?
I believe so. When the proposal was conceived, it was because of a conflict of interest in the RBI managing government debt and monetary policy. Since then a lot of changes have taken place.
The FRBM Act prohibits the RBI from entering the primary market. So, that conflict has been addressed. But the conflict for government remains — as owner of 70 per cent of the banking system which is, in turn, lending to the government. That conflict of interest persists.
The learning from the recent global crisis is that those systems where central bank manages government debt are more effective. When fiscal deficit is as high as it is in India, it is not only about debt management in the conventional sense. It has larger implications for liquidity management and monetary policy transmission.
The balance of advantage would lie in the RBI continuing to manage public debt until fiscal deficit comes down to very comfortable levels.
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