RBI may have to sacrifice growth to tame inflation: KC Chakrabarty

Washington:
Ahead of the monetary policy announcement this month, RBI deputy governor KC Chakrabarty in an exclusive conversation with NDTV Profit's Ritu Jindal says that the policy may have to sacrifice some growth to rein in inflation as inflation remains the key focus for the RBI.


He further said that the ability of the Indian banks to manage and monitor non-performing assets (NPAs) needs improvement. “NPAs are likely to inch higher as the economic situation gets difficult,” he warned.

 


Below is the interview. Watch the accompanying video here.

Between growth and inflation, which one do you think deserves priority right now currently?

For the monetary authority, the central bank, inflation will always remain the most important factor. But that does not mean we cannot grow, we can. The Reserve Bank follows a system, which you called a multiple indicator, so you look into various indicators that combine the monetary policy together. But then inflation and implying stability will continue be the most important factors. We are saying one thing from a long time that we cannot have high growth with high inflation. If we want high growth, there is a need to bring the inflation down and temporarily, we have to sacrifice the growth to bring down the inflation. But we should not hesitate, ultimately growth will pick up and we will be not able to have high growth without a moderate or low inflation.

 

But how much growth do you think that the RBI can afford to sacrifice, we already at 5.3 per cent?

That is a judgment you have to leave. There is no mathematical formula for that and that is why we have to depend on the wisdom of the central bank. However, the final decision is taken by the governor, which is value judgment factor and we have to judge it from longer time horizon.

The RBI, for very long time, has talked about the need for diesel regulation or prize hike, which is very very important to bring the fiscal deficit down. Dr. Gokarn also mentioned a lot of steps as far as the fiscal deficit is concerned and it was expected that it would bring down, but that has not happened. Doesn’t that limit the room for eight cuts going forward?

We must understand in a democratic system, the government function should have the collective wisdom of the people. I don’t agree that the collective wisdom of the people will not improve things but then when we need to make a force and it takes time since ours is a maturing democracy. However, we cannot be saying that nothing is happening. We need to create the right noise, right opinion; spread the right message and things will improve. I don’t think the political class, the ruling class; they are so indiscreet about what is happening in the society. Something good will happen but then it is a maturing democracy and we need to work on many things cautiously.

The transition of monitoring policy is fairly weak. We are not seeing the bank deposit cost coming down. What it required now for them to cut the lending rates?

The transmission of the monetary policy is becoming a problem across the globe. The way monetary policy should affect the interest structure, it is not happening anywhere. For example, even in the developed markets, interest rates are low but not so low for the borrower now because we are passing through finance sell-circle across the globe transmission system. In our case, banks have a lot of problems in terms of what you called the targeted lending. They have the CRR (cash reserve ratio), they have SLR (statutory liquidity ratio) requirement on the asset side; floating rate assets, liability side all are fix rate liabilities now that create more problem. We now need to need structural reforms; we need improvement in the productivity and efficiency of the banks to make the transmission system more effective. We need overall efficiency in the economy. We also need to bring more competition also in the market place.

I will come to the structural change once again but do you think that they need to be better? The liquidity benefits are given to banks because a banker keep on saying they want CRR cuts to happen and then they can push the landing rates going forward?

Let small borrowers compare what transmission has taken place in the market place.

So banks are borrowing from each other?

No, I am not saying that, the logic which we are giving is that they may have their own difficulties. I am not questioning that logic, because CRR cut is not there and that’s why transmission is not taking place, which is incorrect.

Is the RBI watching the inflation data very cautiously right now because that is a number which should give you lot of room and lot of head room to bring down the interest rate…

If you monitor, the core inflation is rather high. We need to look at a variety of factors. Consumer price inflation, wholesale headline inflation, core inflation, non-food manufacturing inflation, etc but inflation is still very complicated.

The finance minister has recently spoken about the non-performing assets (NPAs), saying that banks should be a lot more cautious (about them). Do you think historically, the way NPAs have performed, the banks should now be very cautious about giving loans?

I don’t think that anybody needs to remind banks about NPAs. We are saying that a bank’s ability to manage the NPAs, to monitor them sub self-improvement with the help of technology can better. As far as the trend is concerned, at one stage our NPA is 20 per cent, so historically, we are in a much better position and we all know that in the boom period, NPAs will be less.