The RBI Governor, Dr D. Subbarao, on Tuesday said banks will take some time to internalise the deregulation in savings bank interest rates and adjust to it. It will be beneficial to the economy as it will bring a lot of people into the formal financial sector and support financial inclusion.
The Governor said indications that further rate hikes may not be warranted were given in the second quarter review of the monetary policy so as to give some comfort, some sense of the way the RBI would be going to the market participants, particularly investors so as to manage their expectations.
Excerpts from Dr Subbarao's interaction with the media:
What we both (RBI officials and bankers) understood was that this is not going to cause any disruption to the SB deposit rate or to the banks' management of deposits. They have past experience when term deposit rates were deregulated.
We want banks to devise their own schemes/plans, compete and hopefully do what is best in the customers' interest. Since there may not be such an intense competition for deposits now, we thought this might be a good time to do it (deregulate). This was the last of the interest rates that remained regulated.
It will be beneficial to the economy as it will bring a lot of people into the formal financial sector and support financial inclusion. Hopefully, the plain-vanilla SB account (below Rs 1 lakh account) will be structured in such as way as to be friendly to low-income households and bring enormous economic benefit.
Our expectation is that banks will take some time to internalise this and adjust to this. If and when we come across some problem that needs regulatory intervention, we will then come in rather than anticipating something at this time and responding to that.
Deregulation of SB rate was one of the pros that we mentioned in our discussion paper that it will make monetary transmission more effective. That certainly was the motivation.
On the monetary policy stance
The two considerations — persistence of high inflation and moderating growth (the downward pressures and risk to growth are greater today than they were three months ago) — dictated the monetary policy stance.
Therefore, even as we were coming to bringing inflation down, we also have to be sensitive to moderating growth. So, we wanted to give some comfort, some sense of the way we would be going to the market participants, particularly investors so as to manage their expectations. This is in the hope that they will now plan their investments on a more predictable market situation.
We have not given any message to banks on monetary transmission. We believe that this signal will transmit and they will react to that.
Exchange rate and inflation management
We will not use exchange rate as an instrument of inflation management. Certainly, admittedly, depreciation of the rupee has added to inflationary pressures. But this depreciation is not due to any change in our economic situation, it is due to factors outside of India.
It might reverse in course of time when the external situation settles down. It's not clear that it will reverse completely, that might well happen but that is not a certainty. But certainly it will adjust back.
Government borrowing and monetary policy
Our monetary policy is determined independently of the government borrowing. There is no sensitivity or concern about the cost of government borrowing impinging on the monetary policy.
However, to the extent that fiscal deficit is a variable in inflation, of course we take that into account in estimating our inflation numbers, projecting inflation outlook and in calibrating our policy.
Need to step up supply-side response
For inflation to ease on a sustainable basis and for growth to pick up, we need supply-side responses by way of structural food inflation constraints being eased, infrastructure bottlenecks being removed, reforms being resumed or accelerated and food supply-chain issues being handled.
So, all these are necessary for the supply-side response to keep inflation at a low level and keep growth going.
Counterfeit notes
When we looked at the data regarding detection of counterfeit notes, it was quite skewed across banks. There were just one or two banks that were reporting this. This means other banks were not paying adequate attention to detection and reporting of these notes.
It was agreed that banks will introduce training for detection and reporting of counterfeit currency. In calendar year 2012, at least 20 per cent of banks' frontline officer and sub-officer staff will be trained in this.