You have cut the CRR by 200 basis points (bps) and the repo rate by 125 bps over the past one and half years. Yet transmission has been weak and consumers have not received the benefit?
The central bank, when it cuts rates, is also concerned with the transmission of the policy signal on the lending rates of banks. It would be inaccurate to say that monetary transmission has not taken place. It has been there — although not as much as we would have liked or expected. I believe that the cumulative response to our actions over the last few months is being taken by banks and will be seen in the months ahead.
Could you have done anything different as banks have not been acting on this signal?
I don’t think so. We take these decisions in real time and it is difficult to see what the consequences would have been. So I don’t think our policy stance would have been any different.
Net interest margins for banks have been high. Do you think banks could therefore transmit lower rates for consumers?
Transmission is possible. They have sufficient margins and I think by the sheer pressure of competition they will sacrifice some margins and will transmit the cuts.
After your policy announcement, banks said they won’t be transmitting the cuts?
I think banks interpreted the question on cutting rates to mean whether they would cut rates tomorrow or next week. If you take a slightly long term view, then transmission will take place.
Banks were asking for a 50 bps cut in CRR along with repo rate cut…
That is their wish list!
Why didn’t you cut Cash Reserve Ratio (CRR)?
We believe that the economy required only a 25 bps cut in repo rate. We believe that the liquidity deficit is not a structural one that requires a structural response. That is why there was no CRR action. You must also recognise that in terms of sheer magnitude the impact of the CRR cut is relatively small.
You took over as Governor at the start of the 2008 crisis. What are the changes you witnessed in the economy and where do we stand now?
In terms of the economy, when I took over, it was at a time of a crisis. But we were growing vigorously before the crisis, with aspiration for a double digit growth but now we are recording the possibility of the lowest growth in many years. Now we talk about growth in the 12th plan at 8.3 per cent, much lower than double digits.
Our potential growth rate as assessed by the Reserve Bank is lower. So even as growth rates are lower I think one thing that has not changed is that the long term growth drivers of India are intact.
How is the difference between the Wholesale Price Index(WPI) and Consumer Price Index (CPI) impacting policy decisions?
The Reserve Bank looks at not just WPI. We look at the sub components of WPI. We look at the CPI. In fact in our document we reported the CPI movement. We are aware that the level of CPI inflation is important because that’s the inflation people experience in the market. That’s inflation which shapes the inflation expectations. So we know that is important.
There are differences, we factor all these differences and study the CPI inflation as well in determining our policy action.