Mumbai: Reserve Bank of India governor D. Subbarao is not yet convinced that a recovery is on and says India cannot be on the path to recovery unless the world economy looks up. That might mean that there could be more rate cuts in the offing.
And, to create the conditions for downward movement of policy rates, he wants the new government that will take office in the next six weeks to take a close look at the entire interest rate architecture, including the politically sensitive rates on small savings schemes and savings bank accounts.
Road to recovery: Subbarao says the decision to lower the reverse repo rate below the savings rate was taken after considering all arguments. Abhijit Bhatlekar / Mint
The mandated savings bank rate of 3.5% has so far been perceived to be the floor for the policy rate. You had also said so in the past. But now you have brought down the reverse repo rate to 3.25%. Does this mean that the savings rate too will be pared?
There has been a lot of debate on whether the savings rate is a floor for reverse repo rate and whether there is any link between the policy rate and savings rate. Indeed, some people said that we must first bring down the savings rate before we bring down the reverse repo rate. After considering all the arguments for and against rate adjustments, we have decided to bring down the reverse repo rate below the savings rate.
The question is: Will this militate against financial inclusion? Will it go against the interest of small savers who put their money in banks? Will the banks stop actively canvassing for the savings bank business?
My discussions with banks indicate that this will not be the case and the small savers who keep money with banks will continue to do so. It is RBI’s belief that people at the lowest economic plank must get a viable rate of interest.
Having said that I would like to point out that the actual rate what savers earn on savings bank is less than 3%.
So, you are ruling out any possibility of cutting the savings bank rate.
No, I am not ruling that out. We will have to examine that in due course.
After the new government comes in?
Yes. This is an issue with political dimensions.
Will you push the government to take a relook at the entire interest rate architecture, including various small savings schemes? Banks have not been able to bring down their deposit rates because the small savings schemes offer high rates.
I am sure that will be an issue. Having been in the state government, the central government and now RBI, I know that when interest rates outside in the market are high, states want small savings and they don’t want the rates to be touched. On the other hand, when the other money is cheaper, they don’t want to take small savings.
I think when the new government takes office there is need to look at the interest rate structure, including small savings and savings bank’s rate of interest. We should look at all of them in a comprehensive manner.
Why aren’t you touching the bank rate? For years now, it has been 6%.
This is something I will have to learn…What’s your view on this?
It doesn’t seem to serve any purpose.
I am told it signals the RBI view on long-term interest rates and inflation. If it continues to signal that, there is a need to keep it. But I will certainly reflect on what you said. I believe in keeping things simple. If something can be eliminated, we should eliminate it.
You don’t seem to believe that the worst is behind us.
There are some tell-tale signs of revival. There are positive signs—purchasing managers index for March is still below 50 but has gone up. The IIP (index of industrial production) number is negative for February but still for certain sectors such as capital goods, FMCG (fast moving consumer goods), it has gone up. People are telling me about upticks in cement, steel, automobiles…But I personally believe that these indications are still not definitive enough.
Also See 10 Monetary Moves (PDF)
People also say that India can recover even before the world starts recovering. That’s again a matter of judgement. But I believe that a robust recovery in India is not possible until the world starts recovering.
Do you read any indication of recovery in the stock market movement?
I do not think that the stock market movement is an indication that should influence the monetary policy.
You have continuously goading banks to lend. But the bankers say there is no demand. In a recession, the demand for loans does go down. Why are your forcing them?
We have discussed this with bankers. They have been saying that it’s not so much a supply problem and that credit demand has declined because of economic downturn. They also said credit demand from oil and fertilizer companies has gone down and working capital requirement has gone down because of decline in commodity prices.
But you know it’s always a question of supply and demand. There is no credit demand at the going rate of interest. If you reduce the rate of interest, there will be demand.
You are flooding the market with money and driving loan rates down. Isn’t there the danger of rising inflation sooner than later?
We are conscious of the exit options; of balancing the short-term compulsions with long-term sustainability. Having said that I do not want to wish away the challenges of unwinding all the measures that we have taken. We have looked at the monetary aggregates and in spite of the liquidity injection that we have done in 2008-09, many of the monetary aggregates have remained in line with our projections and we hope that we can manage that in 2009-10 too. Down the line there will be challenging, complex and difficult exit options and we will have to manage them. I am mindful of inflationary pressures coming back….
When do you see the recovery happening?
I am unwilling to put my neck out on this issue.