We have been taking a pragmatic approach: Raghuram Rajan

Raghuram Rajan on key policy rates: ''The medicine seems to be working...before the patient has run the full course of the medicine, do you want to take a chance and take him off the medicine?''

September 30, 2014 05:05 pm | Updated December 04, 2021 10:57 pm IST - Mumbai

Raghuram Rajan, Governor, Reserve Bank of India (C) along with the Deputy Governors (from left) H. R. Khan, Urijt R. Patel, R. Gandhi and S. S. Mundra addressing a press conference on the bi-monthly monetary policy review in Mumbai on Tuesday. Photo: Paul Noronha

Raghuram Rajan, Governor, Reserve Bank of India (C) along with the Deputy Governors (from left) H. R. Khan, Urijt R. Patel, R. Gandhi and S. S. Mundra addressing a press conference on the bi-monthly monetary policy review in Mumbai on Tuesday. Photo: Paul Noronha

After presenting Reserve Bank of India (RBI)’s fourth bi-monthly monetary policy, Governor Raghuram Rajan fielded a range of questions. Edited excerpts:

Does the RBI have a level of the rupee in mind?

We are not there to protect a level. We are not trying to keep a level in mind and say this will be what we will stick the rupee at. Our inflation rate is different from the rest of the world. The real value of the rupee keeps changing. The nominal value will at some point have to adjust to that unless productivity also pulls up in the economy. So lots of forces determine the fundamental value of the rupee. Our objective is not to stand in the way of those forces.

The RBI’s exchange rate policy, historically and today, has been to prevent undue volatility in the rupee. And so I don’t think anybody should, therefore, assume that it is okay not to hedge foreign currency exposures.

How many more quarters for credit growth to pick up?

You are asking me to look into the future. Credit depends on investment. Investment depends on that nebulous, hard to fathom thing called animal spirits. Now, we thought we had fair amount of animal spirits with the new government coming in and all the euphoria. Now that has to translate into action by the corporations. Some bankers tell me they are seeing glimmers of action on the smaller items — the brownfield investments. But it is not anything to feel tangible. What we need to build this recovery solidly is tangible, strong investment across the board. So, we are waiting for that. I don’t think it has happened yet.

Monetary easing

There are two points here. One is that how much are interest rates a key issue in preventing growth at this point. And I would say they are not the most important factor but they are not irrelevant as a factor because after all the reason why we keep the interest rate high is to curtail demand so that demand comes more in line with supply. So, I don’t think they are the most important factor.

And second, there is no getting away from the fact that there is a general consensus — we want to bring down inflation. I have one tool to do that which is interest rate. Demand and supply act over two different periods. Today, if I put investment in the ground to create supply then that supply will emerge three or four years down the line, not tomorrow. But the demand is there today. I can curtail demand over two or three quarters through monetary policy but I create supply only after three or four years. So, in terms of which you have to bring in balance, probably demand is easier to bring into balance rather than supply. That is not say we should neglect supply. That is precisely why we haven’t raised interest rates to 18 per cent.

Interest rate is a blunt tool. Why not cut the policy rates?

Interest rate is a blunt tool but it is also the only tool. We have been pragmatic and the medicine seems to be working.

The problem is before the patient has run the full course of the medicine, do you want to take him off the medicine and say let us take a chance. That is always the danger in Indian policy that we have to have the discipline to stay the course.

On wilful defaulter

The Gujarat High Court said you can’t, sort of, involve every director as a wilful defaulter. Some of these people may be innocent bystanders. We are not curtailing the right to do business but we are curtailing the right to steal from banks. We respect Hon’ble Court’s judgment and take actions accordingly.

In terms of curtailing bank finance, let us be very careful. What we need to do in the country is get a system where somebody makes a loan and has a reasonable prospect of receiving the loan back as repayment. If we curtail that process by which they can recover their loan, you are doing far more damage to the process of running a business. These measures — wilful defaulters and non-co-operative defaulters — are ways to ensure that there is a penalty to non-repayment/ to misuse of funds from the original stated business purpose. In that sense, I believe, that there are ways to make sure that lenders feel confident when they lend that the money will be used for appropriate purposes, they can charge a reasonable interest rate and the money will be returned. By preventing such money from being returned, I think, we are standing further in the way of business than helping it.

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