BackWhat Raghuram Rajan said beyond interest rates
RBI governor Raghuram Rajan addressed a number of other issues at a press meet after announcing the bi-monthly monetary policy
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Mumbai: The Reserve Bank of India (RBI) on Tuesday kept its benchmark interest rates unchanged while keeping its stance “accommodative". The central bank said it will keep a tab on the market to ensure adequate liquidity. Going beyond monetary policy, RBI governor Raghuram Rajan addressed a number of other issues at a press meet after announcing the bi-monthly monetary policy. These are some of the key points made by Rajan and the top team.
On bad loans
The RBI has mapped out different levels of stress and believes that bank balance sheets are in a position to manage any emerging stress. In particular, the government has assured that enough capital would be provided for state-owned banks to help them clean up their balance sheets. The regulator has been in discussion with banks to ensure that they are building adequate provisions against possible bad loans, said Rajan adding that these provisions can be written back if the bad loans don’t materialize as expected. The RBI is also working on revisions to its joint lenders forum (JLF) and strategic debt restructuring (SDR) rules, which will be announced shortly, said the governor.
“What we had focussed on in the process of cleaning up bank balance sheets was to give banks various powers to deal with stressed assets. There is no point pushing a clean up when powers are limited. Over the last year and a half to two years we have enabled that. Now the time has come to push more on the recognition and provisioning," Rajan said.
Rajan also said that stressed assets should not immediately be treated as a total write off. “Some of these cases need changes in conditions, changes in terms, perhaps changes in promoters and could very well repay a fair amount of value in time," he added.
On liquidity and bond yields
The RBI is monitoring liquidity conditions and will continue to look at emerging liquidity needs and address them using all available instruments, said Rajan. He added that liquidity conditions are not the only factor impacting bond yields in the market and noted that factors such as global yields and inflation expectations also impact yields. On rising yields in the domestic market, Rajan said that yields in India have not hardened as much as in other economies.
“It (rising bond yields) is a risk we should be aware of and often the role of somebody who tries to manage market stability is to warn about risks. This doesn’t mean that the risk will be realised. Hopefully we will take enough actions that the risk becomes a remote possibility," he said.
Stalled projects
The RBI has also pointed out that there is an increase in the level of stalled projects in the economy, which is certainly a cause for concern. While the government is looking at remedying the situation, the banking regulator will be keeping a close eye on the progress, Rajan said.
“Over the last couple of quarters, the increase in the number of stalled projects has picked up and that is a cause for concern because the steady improvement that we had seen seems to be halted for a while," he added.
On fiscal deficit
In the policy statement, governor Rajan stated that the regulator will be keenly watching the government’s upcoming Union budget and the kind of structural reforms, which will be introduced in it. While Rajan did not state which specific reforms the regulator would want to see, he did say that these should be those that boost growth while controlling spending. Such reforms would create more space for monetary policy to support growth while ensuring that inflation remains on the projected path of 5% by the end of March 2017, he said. “It is not our place to tell what the government should do but we will see what the government does and then react accordingly."
On bank rates
Discussing the transmission of lower rates by banks, Rajan said that he expects banks to follow suit, with the move to a marginal cost of funds based lending rate (MCLR) in April. The RBI governor said the MCLR mechanism would definitely be an improvement over the current base rate linked lending and would improve transmission in the banking system. Rajan said the RBI’s measures to clean up bank balance sheets would also help them take their focus away from dealing with legacy issues and look at lending to new applications, allowing for better growth in the medium term.
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