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RBI governor Raghuram Rajan addressed a number of issues ranging from the independence of the central bank to the transmission of monetary policy through the banking sector. Abhijit Bhatlekar/Mint
RBI governor Raghuram Rajan addressed a number of issues ranging from the independence of the central bank to the transmission of monetary policy through the banking sector. Abhijit Bhatlekar/Mint

I think de facto, the RBI is independent: Raghuram Rajan 

What Rajan said at the RBI press conference

The Reserve Bank of India (RBI) on Tuesday kept its policy rate unchanged even though it signaled that its stance remains accomodative.

Speaking at the press conference after the release of the monetary policy, RBI governor Raghuram Rajan addressed a number of issues ranging from the independence of the central bank to the transmission of monetary policy through the banking sector.

Here are some important comments made by Rajan.

On transmission of lower rates

Much of the transmission that we are seeing today is not through banks, but through money market rates. Money market rates have come down significantly due to RBI action. Those money market rates feed in to the rates at which non-banking financial companies (NBFCs) borrow, at the rate at which they issue commerical papers.

Transmission takes place over time. What is important to remember is that monetary policy is not like a lever you press and then you get immediate action. It is about 3-4 quarter lag between when the rates are cut and when the effects are seen in the economy. We started cutting rates in January and I expect to see the effects only after September. What the rate action does is give a signal, that signal then gets turned into plans, which then fructifies down the line and turns into activity. What we should be looking forward to now is the effects of our rate cuts earlier this year.

On tepid loan demand

Today it is hard to argue that the large firms have difficulty in accessing funding. They certainly can go to the commercial paper market, but the banks too are looking at good opportunities to lend. Small and medium enterprises have always found it difficult to raise funds and liquidity constraints in the recent past may in fact be higher because they haven’t received payments from those who owe them. That is an issue we need to continue looking at how to resolve. For now I am not overtly perturbed by the tightness in credit flow. My sense is that as projects will come up, they will find financing given that capital situation in banks is improving.

On bad loans

The two sources of stress are due to global overcapacity in ferrous and non-ferrous metals. The huge discrepancies in China are affecting countries, including India. The second and the most important point of stress is power and that is perhaps more due to domestic factors than international ones. The central factor in the power stress is the distribution companies. If they get resolved in a more permanent way, then that would alleviate some sources of stress in the sector. So our focus is how we can resolve that in a proper way so that we can get power purchases going.

On forebearance for bad loans

There is a thin line between forbearance and flexibility. We have always said that we are for flexibility. We have said that there is no problem to lend to a project even if it is a non-performing asset, so long as it has done something to bring the project back on track and not for evergreening the loan.

Similarly, we are examining 5/25 cases to see that they are being used for the right purposes. (The 5/25 scheme allows banks to extend the repayment schedule of loans to 25 years, with an option to refinance them at the end of five years.)

The point is not to postpone the problem into the future. In fact we insisting that there should not be significant moratorium on the repayment under 5/25 scheme. The primary focus is to get the project back on track rather than postponing the problem into the future.

On exchange rates

We don’t have a target at any point in time. The exchange rate moves due to a variety of factors, including news about what the likely current account deficit is going to be. One of the reasons for the strength of the rupee in recent time in comparison to other emerging markets is because of the falling prices of oil and therefore the shrinking current account deficit.

On independence of RBI

There has been a healthy respect between the government and the central bank. The central bank ultimately decides what the course of monetary policy will be. The government in India has the right to give direction to the RBI and tell it what it should do. There is such a clause in the RBI Act. But that direction has never been given in the history of the RBI. So you have to distinguish what is de jure (by law) and what is de facto (in reality) and I think de facto, the RBI is independent.

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