Mumbai: Reserve Bank of India (RBI) governor D. Subbarao acknowledged on Tuesday that buying bonds in the secondary market on behalf of the government amounts to monetisation even though the government is not making any private placement with the central bank.
Clear talk: D. Subbarao. Abhijit Bhatlekar / Mint
Edited excerpts from Subbarao’s address to the the media after the presentation of the first quarter monetary review at the RBI headquarters in Mumbai:
On the stance of the policy:
There are signs of revival in growth; inflation is not alarming right now but there is need to be concerned and vigilant about the inflationary pressures.
Is the worst for Indian economy ever?
I wish I could definitely say that. The financial system seems to be stabilizing but the global economy is in recession.
Our financial system only had hiccups. We never had deep structural problems and it will recover certainly. The challenge is to increase the flow of credit -- both the demand for credit as well as the supply.
On open market operations (OMO) or bond buying from market:
In January and February we put out a programme for liquidity management along with government borrowing programme. We did this in order to manage market expectations, taking into account the extraordinary anxious sentiment in the market. We will continue that programme in this fiscal.
Also Read RBI signals end of loose monetary policy
We will follow the indicative calendar of OMO. It is very difficult to predict the liquidity situation. Should we deviate from the projection, we will tailor the OMO programme accordingly.
We want to give you as much certainty as we can, but we cannot give you any more certainty than we can. But we will certainly continue with the stance of being transparent and open.
I think what we have is a problem of terminology. If we agree on terminology, I think lot of this confusion will not arise. First, there is the OMO. If the RBI operates in the secondary market, that is monetisation. There is the other alternative of private placement with the RBI where the RBI is operating in the primary market. That also leads to monetisation. But that is prohibited by the FRBM (Fiscal Responsibility and Budget Management) Act.
What we have prohibited from doing by the FRBM Act, we are not doing. We are not allowing the government to do private placement of debt; we are not in the primary market. What we are doing is operating in the secondary market.
Both the term leads to monetisation but we do only that part of monetisation which is permissible.
Outlook on the interest rate scenario:
In this policy we have kept the rates unchanged. It will be inappropriate for me to speculate on the path of future policy moves.
On exit policy, or taking away excess liquidity from the system
We talked about exit strategy in order to manage the expectations. Around the world, central banks and governments are talking about exit policies.
The Obama administration (in the US) has given a road map for reverting through a most stable fiscal stance.
In the interest of predictability we talked about an exit strategy. But you may ask why it is not more detailed? Because it is not possible to have any more details now.
On fiscal deficit target disclosure:
The finance ministry gives the fiscal deficit target. They should also give the details — what will be the expenditure, the tax revenue, etc.
The quality of fiscal adjustments is equally important. There has to be emphasis on the quality of fiscal adjustments.
On possible overshooting in the market borrowing programme:
I don’t expect the market borrowing programme to be larger. I think the fiscal impact of the latest announcements (subsidy for housing loans) will be relatively small.
The government is very conscious on fiscal consolidation. Should the government increase the revised borrowing, I am confident that reserve bank will manage that.
On restructuring of loans by banks:
The intent behind restructuring is not to hide the loans which are inherently unviable, but to help give liquidity support to otherwise viable units.
On credit to SME sector:
I have told banks repeatedly that they must pay special attention to the micro, small and medium enterprises. They generate employment opportunities in the tier II, tier III cities. The SME sector deserves special attention.
The jury is not out yet. If there is a hiccup in the developed country, the effect in developing country can be addressed by small policy actions. But when the problem is so deep and widespread, complete decoupling is not possible.