New Delhi: Reserve Bank of India (RBI) governor D. Subbarao, who signalled the central bank’s exit from a loose monetary regime on Tuesday, said RBI would act sooner than its counterparts in advanced nations when it comes to tightening policy.
Reversing policy: RBI governor D. Subbarao says he expects a sterner test in ‘peacetime’ than in ‘wartime’.Abhijit Bhatlekar/Mint
In an interview, Subbarao said he expects the RBI and himself to be put to a sterner test in “peacetime” than in “wartime”, as he embarks on a reversal of the monetary stimulus that helped shield the Indian economy from the brunt of the global economic crisis. Edited excerpts:
You are the first Asian central bank to signal a reversal of policy. But why did you start with a hike in SLR (banks’ investment in bonds)? Was it to please the government and to ensure its borrowing programme is smooth?
Not at all. Pleasing the government was not at all a consideration in raising the SLR. What we said was that the first phase of the exit is to reverse the unconventional measures and the first set of measures we took towards liquidity management. If you recall, adjusting the SLR was in the first batch of measures we took (after the collapse of Lehman Brothers Holdings Inc. in mid-September 2008.) Pleasing the government is not on the agenda and not on the radar screen because 80% of the government’s borrowing programme is done. Besides, banks are holding 27.6% SLR. So, it wasn’t to accommodate government borrowing programme, but a measure in getting back to the normal stance.
Was raising the SLR not a retrograde step, given that you are committed to reducing the SLR?
The long-term objective of reducing SLR stands. I cannot at this time say when we will do it, but there is a view that SLR at 25% or 24% is high. As much as other countries are talking about prudential norms or some SLR-like instrument, they certainly are not talking about 24% or 25%. We need to bring it down and we stand by that commitment. But 24%, 25% is not linked to the reform objective. It is linked to the reverting to the normal stance. to the pre-crisis position.
So, it’s a signal of reversal of stance.
I would think so. Yes, it is a signal about reverting to the pre-crisis levels.
There is a dramatic shift in your policy stance. Growth has become the third priority after managing inflation and financial stability. Are you confident that the economy is on a firm growth path?
We have to juggle between the three objectives of price stability, financial stability and growth. At the moment, our balance of judgement was that even as inflation is a concern, growth is fragile. Tightening at this time may not do much in terms of reining in inflation, but may hurt the growth process. Therefore, we refrained, for the time being, from raising policy rates or raising the CRR (the portion of deposits that banks need to keep with RBI).