ET Now
ET Now caught up with C Rangarajan, Former Chairman, PMEAC, for his take on the RBI credit policy. Excerpts:
Mythili Bhusnurmath: Are you surprised or is this what you had expected?
C Rangarajan: The policy is very much on expected lines. It is prudent to wait a little longer and then take a decision on the policy rates. At this moment, we do not know how the monsoon will pan out and the new budget is yet to be unveiled. Therefore, any decision to change the policy rate will have to wait before these things get a definite direction. I believe it is a wise decision to leave the rates unchanged.
Mythili Bhusnurmath: The RBI has cut the SLR by 50 bps. Will this make a significant difference as far as corporates are involved?
C Rangarajan: I do not think so, but it is certainly worthwhile to move towards a lower SLR. The timing has to be decided by the central bank, but I have a feeling that even as of now the banks are maintaining an SLR above the stipulated rate. Therefore, except in the case of some individual banks, it may not make much difference on a whole.
Mythili Bhusnurmath: As far as export refinance is concerned, will a further liberalisation help significantly in pushing up export performance, since this is more a function of global demand?
C Rangarajan: Though export performance is a function of many things, it is primarily driven by global demand. However, the exchange rate is an important factor too, since it influences exports and hence, to some extent, export finance is equally important. Perhaps in the case of export finance, it is not the availability, but also the cost at which it is available, which is important. Therefore, definitely, export finance and the cost at which it is available play a certain role in stimulating exports.
Mythili Bhusnurmath: Will the surplus liquidity, which has made the markets rally of late, pose a risk of an asset bubble?
C Rangarajan: Something will have to be done, sooner or later, because if the capital flows come in and get accumulated in the reserves, automatically there will be a monetary expansion. This level of expansion may not be consistent with the objective of containing inflation and then at that particular point, some degree of sterilisation becomes essential. The sterlization will have to be done through the sale of securities at the disposal of the government or through the issue of special bonds.
However, stabilisation bonds are not a normal instrument in open market operations through which liquidity should be sucked. Therefore, the Reserve Bank will have to keep a careful watch on the impact of the availability of credit as credit inflows come in.
Mythili Bhusnurmath: What can the government do to increase the absorptive capacity of the economy since there is no dearth of projects which require financing? Why is that we are able to direct this excess money into those areas?
C Rangarajan: According to the standard theory, when an economy grows faster, the credit demand tends to increase. One way to neutralise the impact of additional liquidity is to accelerate growth, but then, growth is a function of many factors. For the past few years, the industrial growth has been stalled due to two reasons - one, investment trade has fallen, and second is the fall in output due to the fact that projects have not been completed in time or complementary investments have not been forthcoming.
Therefore, we need to address the issue at two levels - the policy level, in terms of clearing hurdles in the way of implementation of projects. Secondly, at the micro level of seeing why projects are not getting completed. If we address both these issues, at the policy level and at the level of the monitoring, growth will accelerate.
Mythili Bhusnurmath: Are you surprised or is this what you had expected?
C Rangarajan: The policy is very much on expected lines. It is prudent to wait a little longer and then take a decision on the policy rates. At this moment, we do not know how the monsoon will pan out and the new budget is yet to be unveiled. Therefore, any decision to change the policy rate will have to wait before these things get a definite direction. I believe it is a wise decision to leave the rates unchanged.
Mythili Bhusnurmath: The RBI has cut the SLR by 50 bps. Will this make a significant difference as far as corporates are involved?
C Rangarajan: I do not think so, but it is certainly worthwhile to move towards a lower SLR. The timing has to be decided by the central bank, but I have a feeling that even as of now the banks are maintaining an SLR above the stipulated rate. Therefore, except in the case of some individual banks, it may not make much difference on a whole.
Mythili Bhusnurmath: As far as export refinance is concerned, will a further liberalisation help significantly in pushing up export performance, since this is more a function of global demand?
C Rangarajan: Though export performance is a function of many things, it is primarily driven by global demand. However, the exchange rate is an important factor too, since it influences exports and hence, to some extent, export finance is equally important. Perhaps in the case of export finance, it is not the availability, but also the cost at which it is available, which is important. Therefore, definitely, export finance and the cost at which it is available play a certain role in stimulating exports.
Mythili Bhusnurmath: Will the surplus liquidity, which has made the markets rally of late, pose a risk of an asset bubble?
C Rangarajan: Something will have to be done, sooner or later, because if the capital flows come in and get accumulated in the reserves, automatically there will be a monetary expansion. This level of expansion may not be consistent with the objective of containing inflation and then at that particular point, some degree of sterilisation becomes essential. The sterlization will have to be done through the sale of securities at the disposal of the government or through the issue of special bonds.
However, stabilisation bonds are not a normal instrument in open market operations through which liquidity should be sucked. Therefore, the Reserve Bank will have to keep a careful watch on the impact of the availability of credit as credit inflows come in.
C Rangarajan: According to the standard theory, when an economy grows faster, the credit demand tends to increase. One way to neutralise the impact of additional liquidity is to accelerate growth, but then, growth is a function of many factors. For the past few years, the industrial growth has been stalled due to two reasons - one, investment trade has fallen, and second is the fall in output due to the fact that projects have not been completed in time or complementary investments have not been forthcoming.
Therefore, we need to address the issue at two levels - the policy level, in terms of clearing hurdles in the way of implementation of projects. Secondly, at the micro level of seeing why projects are not getting completed. If we address both these issues, at the policy level and at the level of the monitoring, growth will accelerate.
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