Reserve Bank of India
(RBI) Governor Urjit Patel
and senior officials spoke to the media after the fifth bi-monthly monetary policy review
for FY18 on the central bank’s decision to hold key interest rates, liquidity conditions, economic growth and bank credit. Edited excerpts:
If growth doesn’t pick up and inflationary pressures continue, what will you give more importance to going ahead?
Urjit Patel: We have a neutral stance, which means that data flow in the coming months and quarters will determine what we do regarding the policy. So the neutral stance is there for a reason — that all possibilities are on the table. We would look carefully at both inflation and growth data in the coming months. The change in our inflation projection is at the end of the day very small; it is 10 basis points compared to the October policy. And we are still retaining the growth outlook for the full year at what it was in the October policy.
The liquidity seems to be drying up and banks have already started raising bulk deposit rates. Will transmission of rates take place?
Patel: You should look at the existing rate of bulk deposits and where it has been increased to. And then it is more of qualitative assessment, rather than a quantitative. To the best of my knowledge, the wholesale deposit rate was very low in the first place. Secondly, I don’t know what you mean by ‘liquidity drying up’ because our weighted average call rate continues to be below the policy repo rate. So to me it is not at all clear, and we are still undertaking a fair bit of reverse repo operations. So liquidity drying up is just a wrong definition of what you are saying.
Viral Acharya: I think perhaps the market is adjusting to the fact that we have been in remarkably surplus conditions for a while, but we are nowhere close to having reached neutrality. If you were neutral you would pump in liquidity on some days and absorb it on other days. We are still essentially absorbing liquidity, as the Governor says, to the tune of around Rs 20,000 crore to Rs 80,000 crore on a pretty persistent basis. I want to stress something which I mentioned in my remarks as well, which is that the foreign exchange operations in terms of buying dollars in the earlier part of the year was substantial. We injected close to overs Rs 1 lakh crore of liquidity from RBI on top of the demonetisation-induced liquidity.
In a textbook operation, as soon as you inject liquidity you would actually sterilise it with an open market operation because otherwise you will lose control of your monetary policy. We have done it this time with a lag, because we were waiting for the liquidity conditions post demonetisation to normalise, and see whether currency in circulation stabilises.
How difficult is the task of seeding bank accounts with Aadhaar going to be? How are banks prepared?
N S Vishwanathan: We have said that initially the seeding should happen on a demographic basis as it can be done for a large number of people in one go. That we don’t see as a problem. Ultimately, they will have to do the biometric (registration); that will take some time.
Did the MPC consider shifting of monetary policy stance?
Patel: We did not consider shifting the stance because nothing between October and now was significant enough in terms of the macro outcomes to warrant that. And as I said in the first question that was asked, we will look at the data in the coming months and the coming quarters, and decide on the policy based on that which is exactly what the neutral stance enjoins us to do.
You had mentioned about the bank recapitalisation plan as a ‘reform and recap’ package. When do you expect the next cycle of lending to kick-start?
Patel: You know the latest data on bank credit and adjusted bank credit, and total financial resources flows, suggest that we are already on the uptick in terms of the credit growth. So credit is already flowing in, more than what was the case in October and as the economy picks up, the demand for credit should go up and there is enough supply to ensure that lack of credit is not in the way of supporting higher growth. So the uptick in credit growth has already happened.
Banks have continued to report fairly material divergences in bad loan reporting for FY17, there is a bit of confusion on what exactly is going on. Is there another round of asset quality review (AQR) being looked at? In private conversations, bankers say the RBI is moving the goalposts and hence these divergences are coming. Can you please help us understand?
Vishwanathan: I think I must clarify two things, divergences on the basis of inspection used to happen in the past as well. What has changed is the transparency that we have brought in, in the form of disclosure of divergences when they are more than a certain percentage. So that’s actually changed the narrative. So these divergences used to happen even prior to AQR sampling now. Second, I want to make it very clear there has been no change in goalposts, the rules are as they are. We have assessed the banks’ classification based on the rules as they are today and we have found that in some of the cases they have not applied the rules correctly.
You have retained the GVA at 6.7 per cent. What would your projections be for Q3 and Q4 of FY18?
Michael Patra: They are going to seven (per cent) and 7.8 per cent, respectively, so we’re on an uptick from now.