Mumbai: On new bank licensing norms, Reserve Bank of India (RBI) governor D. Subbarao said there are some differences between the government and the central bank and they will be resolved. He defended his decision to involve the finance ministry at the draft stage as the rules have many implications, including foreign investment and financial inclusion.
In an interview a day after presenting the annual monetary policy, Subbarao spoke on a range of issues including foreign banks’ play in India, RBI’s autonomy, the making of the monetary policy and the government’s role in it. Edited excerpts:
Inflation will continue to remain high—around 9%—till September and by March 2012 you will see it dropping to around 6%. What will bring down inflation? Are there more rate hikes coming?
To your first question about the trajectory of inflation, let me say that the first six months (of the fiscal year 2012), we expect inflation to be elevated because of crude prices, demand pressures and the time it takes for a cumulative policy action to play in. In the second half of the year, we expect our tightening (of rates) would play out and have an impact on demand. We are also hoping that some supply response will come.
On the second question about whether more policy action is expected, we have not given any guidance in the document. We agonized a lot about the drafting of the paragraph on what to say and how to say. We said that we need to “persevere” with our anti-inflationary stance even if inflation persists for first six months. What we were trying to say is that we will not be surprised by inflation remaining elevated for the first six months. But that should give no indication one way or the other about whether we will take action or not.
Opening up: Subbarao says the central bank is quite open-minded about deregulation. Photo Abhijit Bhatlekar/Mint
Another big takeaway from the annual monetary policy is hike in savings bank rate. Why did you raise the rate?
I think you must not see them in juxtaposition. On a stand-alone basis, there was sufficient justification for raising the rate—the inflation has gone up; other rates have gone up. There was a strong case for giving a fairer deal to millions of households dependent on this deposit facility.
We are quite open-minded about deregulation. We have spoken to banks but we have not yet got feedback from other stakeholders. I am hoping that we will get that feedback. There is lot of uncertainty about how the situation will unfold. In fact, more uncertainty than any other policy initiative of RBI, and potentially with important implications for the poorer segment of the people. So, we can’t do without consultation and deep thought. The rate hike is an interim measure which would justify on its own.
But it seems like you have made up your mind. Your bias is for deregulation.
I don’t want to dismiss your assertion straight away. Possibly there was a bias but I don’t want to say this.
We are open-minded. However, there is reform logic in de-regulating saving bank rates. All other interest rates have been de-regulated except NRI (non-resident Indian) and savings bank deposits. So, if we were to deregulate, this one is on the radar screen.
What is the status of new bank licences? When do we see the first new bank coming up?
I wish I could give you a definite indication of that. The media is aware of the current status. We have devised guidelines based on the feedback we got. We sent it to the government and there are some differences—not on major issues but on matter of details, and we have to resolve them.
There is one more necessary condition for eventually starting the process—the amendment to the Banking Regulation Act. I think potential applicants should know the rules of the game.
But granting banking licences is exclusively the central bank’s domain. Why did you have to send the draft guidelines to the government? After all, it can always give the feedback, like others, before the norms are finalized.
It is part of the professionalism of RBI because you cannot treat the issue of new bank licence the way you treat monetary policy. We need to have autonomy on monetary issues of regulatory policies—we demand that and the government gives it to us. But on the issues such as new bank licensing, there are many implications—foreign investment, financial inclusion.... The government is an important stakeholder and I believe that the government should have a say. We may not concede everything that the government is asking for but I believe that it’s right to give the government the right to say before we put the guidelines for public consumption.
How autonomous is RBI? You did come to the media pitching for RBI’s autonomy.
That is a broad question. But if we go back to the RBI Act, the central bank has no autonomy because the government has the reserve power to give any directive on any issue to RBI, of course in consultation with RBI. But the fact that they have not invoked that provision is the indication of the respect the government has for RBI and it is also the professionalism and integrity of RBI.
At the very practical level RBI enjoys autonomy. There are some concerns not because autonomy is not eroded but that it could be potentially eroded.
You have come from North Block. Is that an advantage?
That is a judgement third parties like you have to make. But purely from an operational point of view, I think it is an advantage because I know the process, people there and culture of the government. I am not saying that an outsider wouldn’t be able to run the central bank. There have been distinguished people who had run RBI. Some inside knowledge helps at times.
There are times where you need to fight with the finance ministry. As an insider, are you soft in your approach?
Fighting with the ministry is a wrong characterization. No matter where you come from, you need to pick your battles, how important it is, and you need to try and understand the ministry’s point of view. I think a lot of issues can be resolved through understanding. But certainly, if there is an issue (on which) you feel strongly, I think it needs to be taken up with the government no matter whether you have a background with the government or not.
You have always insisted that RBI should be considered first among the regulators. Why?
The RBI is more than a regulator. We are the monetary authority, the debt manager of the government, the gatekeepers of the external sector. We have responsibility for enormous social development agenda. Whenever there are issues with regulators, I think the wider mandate of RBI has to be reckoned with.
You have been trying to make RBI more transparent in terms of the policymaking process. Can we expect transparency in your management of foreign exchange reserves in terms of sharing data on profile of currencies and deployment strategy?
We disclose the forex details every week with a lag of one week. We put out a report every six months on our strategy. Yes, we don’t disclose the composition of forex assets but you must remember that in forex management, we are like any other commercial entity, and disclosure will affect our commercial efficiency.
Your discussion paper on foreign banks’ operations in India spoke about giving them near-national treatment and doubling their exposure. Is there any development on that front?
Many have raised concerns on the issue of national treatment, priority sector obligation and, of course, tax obligations. The tax part comes under the jurisdiction of government. We have talked to the government and urged IBA (Indian Banks Association, a national banker lobby) to talk to the government so that there is clarity on this issue. I think it is only fair that we give clarity on the rules of the game before locally incorporating them.
Larger presence of foreign countries have been debated among developing countries after the financial crisis. We will continue to be open. We will continue to allow foreign banks to come in to the extent they can follow our guidelines and comply with our national obligations.
Are the new bank licensing norms and guidelines of foreign banks’ operations inter-related?
Yes, they are. The rules of the game will make a difference to what type of banks you want to come up.
Will we see both of these coming together?
I don’t think that is necessarily correct. We will move in the mandatory local incorporation first because that has got its own dynamics.
Post the Citibank fraud, there have been talks about regulating advisory services. Who should do that—RBI or the Securities and Exchange Board of India (Sebi)?
We are discussing with Sebi. Regulation of investment advisors falls within the ambit of Sebi. However, to the extent banks do investment advises, RBI needs to get involved because we are the regulators of the banks. At the last sub-committee meeting of the FSDC (Financial Stability and Development Council), we discussed this. Sebi and RBI will continue to discuss that.
You took over this assignment in September 2008, days before the collapse of Lehman Brothers Holding Inc. Was that a more challenging time than now when your are battling high inflation?
From a purely policy perspective, easing policy is easier than tightening because it has to be more calibrated. During the crisis I was on a learning curve. Also, during the crisis, we needed to be doing something—what precisely you did was less important than doing something.
Precise aspects of tightening are much more important during the recovery phase. The challenge will always be there.
At the time of crisis, there was no conflict of interest and the government and RBI worked hand in hand, but now the government is for growth and you are looking for price stability. Right?
We were in constant interaction with the government during the crisis and that’s not the case in normal times. There are always honest differences of view, and we have to manage that. I think differences make for better policy, provided there are mechanisms to manage the differences.
As finance secretary, you were part of the budget-making process. Here, you sign-off the policy. Could you unravel the mystique of credit policymaking?
We try to make it as consultative as possible so that we get all the wisdom that is there in the world of analysis and media. We consult banks, financial institutions, cooperatives, industry bodies, economists, etc. Then, we have our technical advisory committee for monitory policy, which has two members of our central board as well as three external members. After internal consultation we arrive at the policy. As a matter of courtesy, we inform the government.
Doesn’t the government influence you in policy making? Are there occasions when you change your decision on how much to hike after talking to the finance minister?
Eventually, RBI prevails if it has a strong view. But I am receptive to what the government has to say.
You always wanted to get out of your ivory tower and feel the ground realities. Have you been able to do that?
Yes, to some extent. The outreach programme that we started during the Platinum Jubilee has become a regular feature. I have gone to tribal villages of Chhattisgarh, Jharkhand and Orissa. Wherever I go, I try to meet people, bank and state government officials. It is an enormously rewarding experience.
This is the transcript of an interview which was first telecast on Bloomberg UTV on Thursday.