We are in the midst of recovery but it is uneven: Rajan

Excerpts from Reserve Bank of India Governor Raghuram Rajan’s interaction with newspapers:

Tolerance level of crude prices

 Attempt to forecast where prices will be is not our area of expertise. I would guess that today’s level is a reasonable level, certainly manageable from our perspective as a country. But also it is not too low, nor too high. We can tolerate 50 ($50/barrel).

Tight liquidity hampering monetary transmission

 The liquidity situation today is significantly better than it was in early March. Substantial amount of liquidity has been infused. If you follow the reasons why transmission is not taking place, according to the banks, you will find different reasons over time. And the reasons keep varying. The truth is we do need to work on any impediments. Fundamentally, if the demand for credit picks up as well as deposit growth picks up, it will create conditions for banks to pass through more.

 We are looking at how banks compute MCLR (marginal cost of funds-based lending rate) and whether they are following the spirit of the guidelines.

Assessment of GDP estimate

 There are some arguments that say it is understated while there are some arguments that say it is overstated. We have seen the revisions which confirm our belief that we are in the midst of recovery but it is uneven.

Inflation surprise, uncertain trajectory

There are two elements, one was a surprise, and the other was a continuing concern. Surprise was food elements which went up in April while stickiness of core inflation has been a continuing concern. Core inflation has been steady at 5 per cent. I do believe that as inflation expectation comes down, core should also drift down.

Surprise as a strategy

 I don’t think policy-makers surprise unnecessarily. You don’t pick surprise as a part of your policy.

Markets value a certain amount of predictability. But there are certain areas where surprise is a tool.

For example, if they are entities speculating against your currency, you are not going to issue a press release and say you are going to intervene. You keep an element of surprise so that you can hit them with a force that they are unaware of.

Stressed and weak assets

 First, it was to deal with the assets which were deeply stressed. In the last two quarters, the deeply stressed assets were identified and dealt with. Going forward, there are assets which are weak.

Some sort of action will probably be needed and so banks have to look at those and figure it out. As growth picks up there could be upside also.

Timeframe for granting bank licences

 In general, we have tried to give a timeframe for each of the application processes. So far as universal bank licences are concerned, we want to be little careful that we do not give to any and everybody and we do the appropriate due diligence.

We took about six months for granting licence (after filing of application) during the last round. I would say whatever time we took then would be basic benchmark and we will try to meet that.

Big corporate houses left out

 I don’t think we, or for that matter most jurisdictions, are capable of dealing with some of the issues which arise with the possibility of self lending in the corporate houses. If you see banking crisis all over, self lending and self dealing was a big factor.  I think if anybody who had a chance is already in, it could mean whoever is left (out) will probably move to the small finance banks and payments banks and as they develop experience they move to universal banks. So, start in the more restricted bank licence, then move towards the broader one. However, there could be (those) that would get the universal bank licence directly. I am not pessimistic of finding candidates down the line. But I want to make sure anybody who is capable of getting the licence, gets the licence.

Payments banks dropping out

 We wanted to be reasonably liberal in giving payments bank licence to different modes of operations. The typical payments bank could be the mobile companies which have all these outlets already available so that the incremental cost of access points are relatively low and the mobile can work as a wonderful transmission device with a kiosk that they have as cash in, cash out points. Building on an existing business seems to be the way to go to benefit from scale and scope of economies. Others may find a way of doing it which is why the post bank has been licensed, Paytm has been licensed. And they seem eager (to start payments bank).

 This (is) the whole point about competition. You don’t know which direction it will take. We have been agnostic about the direction and allowed thousand flowers to bloom. 

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