RBI not the only player in fight against inflation: Rajan

The Reserve Bank of India’s second quarter review of monetary policy was on expected lines. In a bid to curb inflation amidst weakening growth, the RBI has hiked the repo rate by 25 basis points to 7.75 per cent from 7.50 per cent. Further, the interest at which banks can borrow additional funds has been lowered to 8.75 per cent from 9 per cent.

Banks have also been allowed more headroom to borrow under the term repo facility. RBI Governor Raghuram Rajan elucidated on what guided the monetary policy formulation. Excerpts:

What is the reason for the hike in repo rate?

The point is we thought inflation is higher than estimated, without the policy action. With the policy action, we hope that inflation will move in the direction we want it to move.

I talked about growth and inflation in the same breath. There are projections about growth and there are projections about inflation.

If growth comes in much weaker then that indicates more action is needed on growth. But it also indicates that disinflationary process is stronger than we think it is and that will give us some room on the inflation side. Clearly, both elements will feed into our action going forward.

What action do you expect banks to take following the policy review?

They are going to take the action that they have to, given the demands on their funds and their need to raise funds. What we have said is that we would hope that they would raise more deposits. Now, this does not necessarily have to come only from raising interest rates. It can also come from better deposit raising activities and looking for new deposits elsewhere. So, I would hope that banks present more attractive investment options to savers in this country.

Are we better prepared when the Fed begins tapering its bond buying programme?

We are better prepared this time in the sense that the Government and the RBI have taken some measures to reduce the current account deficit. So hopefully, we will see full evidence of that when the next CAD number comes out. But I think we definitely are better prepared but I wouldn’t say that we can stop doing more. Because so long as we are running a CAD which is above our comfort level (2.5 per cent of the GDP), we are vulnerable. There are other factors like short-term external debt that increases our vulnerability. We have to work on it. We have to increase our exports. But yes…we are better prepared.

What is your take on the fight against inflation?

The fight is for everybody — RBI, government and the private sector. When we talk supply side, we need firms that will invest and who are conscious of the state of the economy also. ….We aren’t raising interest rates sky high because we believe there is also some disinflation setting in. If you see rural wages for instance, numbers show very little growth in real wages. Our sense is a lot of players have to come in and participate in bringing inflation down. RBI is not going to be the only player but also we are not going to disclaim responsibility saying it’s all supply side and take a pass at fighting inflation. We are part of the fight.

Will the current policy have any impact on soaring onion prices?

The hike was not meant to quell onion prices. We have no immediate capacity to bring down onion prices. It is an issue. Clearly, demand has not shot up suddenly to cause the sudden spurt in onion prices. So, there is an element of supply side effects here.

What action are banks taking to recover their loans?

We actually offered a more nuanced view to banks on projects that are stuck. In case of genuine difficulties we have to help in getting the projects back on track. Nobody wins if the economy is deprived of a power plant or deprived of a road, which would otherwise have been functional and helped the economy. But we have also said that in a situation where the promoter is unable to carry that forward, banks should take action. The idea is to get the economy back on track.

The banks are fully cognizant of what they need to do. Everybody (the Finance Ministry and the RBI) is on the same track on that. This is not to create an atmosphere of fear or be vindictive. It is basically what we need to do to get the assets back on track.