Until the economy improves, there is likelihood of these NPAs increasing, says Subbarao in his interview with Oommen A. Ninan

What was the thinking behind the CRR cut?

I have explained the rationale in the policy document. The monetary situation is determined by two variables – the policy interest rate and the liquidity conditions. We want to keep liquidity comfortable. Comfortable liquidity when interest rates are very high does not happen. Lowering interest rates when liquidity is tight does not happen.

In order to balance the growth-inflation situation, we need to calibrate both these variables such that we support growth and support easing of supply constraints but at the same time restrain inflation.

We thought that cutting repo rate at this time might dilute the RBI’s anti-inflationary stance. However, we wanted to keep liquidity comfortable so that within this liquidity, at the given repo rate, there is transmission of our policy rate to lower lending rates and all those who demand credit especially for productive activities at the current rate can get it.

Do you think this CRR cut will result in banks reducing lending rates?

That is the intention not the expectation. Credit must go to the productive centres of the economy and liquidity constraints should not inhibit that flow of credit growth.

While our repo rate reflects our anti-inflationary stance, the demand for credit at the current interest rate must translate into lending rate. That is the objective behind the CRR cut.

RBI has been regulating CRR for some time now. Do you think these funds will go for speculative activities?

Half of the money goes for speculative activity but our endeavour is to see that bank credit flows to productive sectors of the economy. There is speculation and after all, entire stock market is based on speculation. Not all speculation is bad and speculation has value. But it should not be credit going into purely speculation especially at a time when there is uncertainty in the global economic situation.

You have also said that the NPAs are not alarming but disturbing…

Let me explain what I meant by saying not alarming. I said NPAs are not alarming because our banking system is robust. The capital adequacy ratio is at 13.6 per cent at the aggregate level — and that is strong enough to withstand stresses even if NPAs were to increase substantially. That is why I said it is not alarming. But I said it is disturbing because the NPAs are increasing. In March the NPAs were at 2.9 per cent of assets. In June they had risen to 3.25 per cent of gross assets. Until the economy improves, there is likelihood of these NPAs increasing. That is why I said the position is a matter of concern although there is nothing to be alarmed about.

Do you think that the government is doing enough through its fiscal policy?

I believe the government has done quite a lot in the last few months, including politically difficult but extremely important decision of adjusting diesel prices. They have also taken measures to increase investment, especially foreign investments. From what I hear, there are a couple of operational problems at the State and district administration levels. These are areas that the government needs to focus on to help ease supply constraints.

When you said that inflationary pressure will ease in the fourth quarter, is it possible to give a time frame for this to happen?

It is very difficult at this point to say precisely at which point, if at all we might take policy action. Quarterly policy review is scheduled for January 29 so that will be an occasion to revisit the macroeconomic situation and see if we need to take a policy action.

But from current perspective, we are three months away from January-March. We expect inflation to keep going up over the next few months and then come down. We also need to look at how growth and inflation numbers come in and we will have to take a call based on that.

High interest rates affect the common man because corporates are able to access funds easily from other sources. What is your opinion?

We are concerned about the plight of the common man. We want to make sure that he has access to credit at reasonable rates of interest that he can afford. We are also concerned that there should be low and stable inflation so the common man is protected.

So, the RBI policy is aimed at making the quality of life better for the common man — balancing between a low interest rate at which it wants to borrow from the bank and a high interest rate that is demanded if we need to stave inflation.

We must also remember that we must look at not only the lending and borrowing rates but also at the cost. Several people, when I travel across the country, say interest rates are not high enough because they do not get a remunerative return on their cost. Also, we have to make sure that people can feel a positive interest on their deposits.

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