A day after Finance Minister P Chidambaram exhorted banks to pass on the benefit of rate cuts, Reserve Bank of India Governor D Subbarao, on Thursday, pointed out that monetary policy transmission was “not as agile as it should be”.
“Banks should respond and it is true that some have and some have not. There are several reasons why monetary transmission is as not agile as it should be, but we [the RBI] are conscious of the need for monetary transmission,” Dr. Subbarao said, while addressing reporters after the central bank’s board meeting here.
“Nevertheless, we are very conscious of the need to be supportive of economic growth. When we calibrate the short-term policy interest rate…banks should respond by calibrating lending rates,” he added.
In another curious Finance Ministry-RBI juxtaposition, this time on bank licences, Dr. Subbarao emphasised that “not all eligible applicants may get bank licences”. Mr. Chidambaram, on the other hand, had earlier said that there would be no cap or ceiling on the number of new bank licences, saying that it depended on the number of eligible applicants.
Few months
“We have said before that not all eligible applicants might get licences and that statement stands. The RBI does not want to get locked into a number right now. We will conduct an internal evaluation over the next few months, and then send it to an external committee as well,” Dr. Subbarao said.
Responding to a query on whether there would be a conflict of interest when it comes to Aditya Birla Nuvo’s proposal, considering that the Group’s Chairman Kumar Mangalam Birla is also a board member of RBI, the central bank chief said “this [Aditya Birla applying for license] is a recent development. We have to take a view on it…we will discuss this with the Government”.
Talking about the rupee, the central bank chief made it clear that the RBI had no “exchange rate target”— a statement that sent the domestic currency tumbling by nearly 20 paise during intra-day trade. The rupee, however, ended the day slightly up and closed at 60.13.
“We employ all instruments available to us to manage volatility, and we do try to manage volatility. But we do not have an exchange rate band,” he said.
Fielding a range of queries, Dr. Subbarao also said that there was no proposal at the moment that would give interest on CRR (cash reserve ratio), a measure that SBI Chairman Pratip Chaudhuri had recently demanded.
“Just for the sake of argument, even if we give interest on CRR [to the banks], we could calibrate the rate of CRR such that the interest we give is completely offset. The decision to raise or lower CRR will depend wholly on monetary policy considerations and liquidity,” he said.
CAD concern
He also voiced concern over the high current account deficit (CAD), saying that it should be reduced to a sustainable level.
“Yes, in a sense, we are concerned. The sustainable CAD for the economy as several people have said, including the Reserve Bank, is 2.5 per cent,” he said. Responding to a query on the increasing non-performing assets (NPAs) of banks, Dr. Subbarao pointed to the fact that between December 2012 and March 2013, NPAs registered a marginal decline.
“It is not clear, at this time whether it [the marginal decline] is a trend or whether it is just a temporary blip. We have to wait for next quarter data. In addition to NPAs, we also have to reckon with the restructured assets, which in spite of being restructured are treated as standard assets,” he said.
Nevertheless, he said banks were well capitalised “to be able to withstand substantial shocks.’’On the topic of fraudulent schemes, Dr. Subbarao stressed that it was not a “regulatory failure” and that State governments hold the major responsibility of taking steps against such schemes.
“The government has responsibility. But I believe the primary responsibility of this is with the state governments, because only they have the reach for the necessary surveillance of the enforcement against these illegal schemes,” he said.
