On rate cuts, Rangarajan says the impact of monsoon needs to be seen. If vegetable prices decline, then the RBI could look at cutting rates before December
Hailing the appointment of Urjit Patel as the new Reserve Bank of India governor, former RBI governor Dr C Rangarajan says that his priority will be to stay course on the inflation target.
“Immediate task is to keep inflation in control,” he says.
Deepak Parekh, Chairman of HDFC too believes that Patel as the RBI governor is an excellent choice as he is young and energetic and has worked at various organizations like IDFC, Finance Ministry and International Monetary Fund.
On rate cuts, Rangarajan says the impact of monsoon needs to be seen. If vegetable prices decline, then the RBI could look at cutting rates before December.
Another focus area for Patel would be cleaning up balance sheets of public sector banks, he says adding that credit growth must be the priority.
The issues in infrastructure will also be resolved as Patel knows the internal issues with the sector, says Parekh.
Open market operation, a tool used by the central bank to maintain liquidity, will be continued under Patel’s regime as well.
Below is the verbatim transcript of Deepak Parekh & C Rangarajan's interview to Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Latha: You know Dr Patel, I would assume, a little better than many people, after all he was in IDFC, tell us what you make of this choice?
Parekh: It is an excellent choice. It is the right choice because of continuity in Reserve Bank of India (RBI) policy, stability in the fiscal. Out of all the candidates that were talked about, the government, finance minister and the prime minister has picked the right candidate. He is young, he is energetic, he has worked all over the places, he has worked with the government, in the finance ministry, he has worked in IDFC, in infrastructure. The banking problems that are here today with us is due to infra lending. He has worked with the RBI for over three years, he has worked with International Monetary Fund (IMF), so he is the right choice. I think government needs to be complimented for selecting such a good candidate.
Latha: Would you worry that immediately therefore we should not worry too much about rate cuts, they may not come as rapidly as perhaps some people in the market wanted? I was not one of them.
Parekh: He has his own mind. He always had his own mind and an angle in IDFC and he spoke out all the time what he thought and what he felt. He has been in the RBI, he knows the problems and what is the right time to cut interest rates and you have a monetary policy committee (MPC), it is not a single person, it is not the governor's single prerogative.
Latha: What are your first thoughts, deputy governor being made governor, also he is the author of that monetary policy framework, an inflation warrior like you?
Rangarajan: Yes, it is an excellent choice. The government and the RBI has put in place a new monetary policy framework and that is not without controversy also. Therefore, to make that new framework operational and function effectively, you need as governor someone who is committed to that policy framework and who can be more committed to it rather than Urjit Patel who is the co-author of the new understanding and therefore I welcome the appointment of Dr Urjit Patel as a governor, it is an excellent choice.
Latha: You still keep very close tab on inflation fiscal deficit down to the last second decimal point, you know the numbers. What would be your advice to the new governor?
Rangarajan: I think the immediate task is keep inflation in control but watch how inflation behaves. I certainly behave the recent spike in the price level, it is largely due to the rise in vegetable prices and others which have been badly affected by the drought last year.
But, the monsoon has been good and all indications are it will continue to be good in September and therefore I expect the prices to come down. Therefore, he should be guided by what is happening to inflation. The new monetary policy committee will also help him in taking a decision regarding the policy rate. Obviously he should wait for the impact of the monsoon to be felt before making a change but certainly I believe that the recent price rise is more due to seasonal or the effects of the bad monsoon.
Latha: Dr Patel as you would well know in around 1994 period had authored a seminal paper with which became the bedrock of fiscal discipline as well, he had spoken very strongly against money printing to bridge fiscal deficit. Do you think therefore we should expect something different on open market purchases by the RBI, since April RBI has been regular open market operations (OMOs) to keep the market flush, should we expect different policies now?
Rangarajan: Urjit Patel wrote a paper on the fiscal deficit and perhaps it was about that time, I did a piece on 1988 on the debt accumulation and its impact along with its two co-authors. So we were one of the earlier to talk about the need for controlling fiscal deficit.
As far as the OMOs are concerned, the most important thing is that OMOs are a regular instrument available to the Central Bank for increasing the liquidity in the system. In fact, more recently we have also been discussing about the temporary liquidity and permanent liquidity. Now, while the discount window or the other windows provide temporary liquidity, the permanent liquidity is provided only through OMOs. Therefore, OMOs are a necessary part of the functioning of the Central Bank, all that is required is to regulate the OMO in such a way that the overall liquidity remains at the level which is consistent with price stability, consistent with what the economy needs. Therefore, I would think that OMO will continue to remain as an important instrument for injecting liquidity or for withdrawing liquidity.
Sonia: Coming back to the earlier point about rates, should we assume that rates are in all likelihood to be kept on hold at least until the end of 2016, purely because prices are on the rise as you referred to earlier and there is also an upside risk to the inflation glide path of 5 percent.
Rangarajan: I do not think that we need to wait till the end of the year. We need what the impact of the monsoon, if the monsoon happens to be good in September also, one will see the impact of that very soon. For example, vegetable prices immediately are affected by the monsoon, therefore you will find an impact on vegetable prices very soon.
Therefore, as the prices show a sign of decline then there may be an opportunity for reducing the rate even before December. But, that will all depend once again as I have been saying, on the behaviour of inflation and the view that he has taken as to whether it is definitely a sign of decline or it is only temporary. Therefore, you have to watch, the MPC should watch as to how the inflation is behaving before taking a decision.
Latha: You were telling us what you are expecting or what Dr Patel could do for infrastructure since he understands that space well.
Parekh: He was in the early days when infrastructure financing just began and he spent 9 years in IDFC. He was the Chief Economist in the earlier days and then we also elevated him to the board of IDFC. Now, he was involved in policy making with practically all infrastructure sectors at that stage and he wrote a number of papers and he was on a number of committees with me, be it telecom, be it power, be it roads, be it ports. He has an angle which always found solution.
He was also involved in seeing what the policy issues were wrong, which made the private sector companies and the infrastructure companies weak, why projects stalled. He has done a number of papers on what went wrong with projects, what were the key issues that derailed the infrastructure projects and hence non-performing assets (NPA) of the banking system.
So, so far as infrastructure funding is concerned and what needs to be done, the remedy, what are the projects that are still stuck, what can be done, there is no one better than him to manage that system and handle that system. That way, on infrastructure also, experience of a new - in fact Dr Rangarajan was the governor at that time when we started IDFC, how to fund infrastructure and how to solve these issues, he will take a keener interest being a part of the system of the earlier days.
Latha: The other big problem or issue facing the Reserve Bank is the asset quality of the banking system. Some of it has definitely been cleaned out. What would you advise Dr Patel on that front?
Rangarajan: The cleaning up of the balance sheet is the first thing to do. Prudential norms only make transparent the health of the banks because what further action should be taken in order to prevent the accumulation of bad assets is also important. Therefore the next step should be to move on to a stage in which the credit can begin to grow and the banks feel confident to provide additional credits, probably infusion of capital however small it may be. It must be done as early as possible so that the banks get the feeling to move on and to provide additional credit. Therefore, the first step is to clean up, the second must follow namely to provide additional credit.The Great Diwali Discount!
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First Published on Aug 22, 2016 09:29 am