RBI working on new monetary policy framework

Updated - December 04, 2021 11:29 pm IST

Published - December 02, 2014 09:20 pm IST - MUMBAI

The Reserve Bank of India (RBI) Governor Raghuram Rajan on Tuesday said that the central bank is in discussion with the Government on several issues including the new monetary policy framework.

“As far as the new monetary policy framework goes”, said Mr. Rajan, adding, “We are in discussion with the government and we hope to finalise a framework shortly.”

The government has indicated that it is comfortable in setting a 4 per cent plus/ minus two per cent as suggested by a number of committees, including the Urjit Patel Committee, for inflation beyond 2016, said Mr. Rajan while addressing a press conference to announce the Fifth Bi-monthly Monetary Policy here.

Second, he said there is substantial financial stress still in some sectors. “We have been taking a holistic view instead of a sector by sector view, keeping in mind the need for flexibility in financial restructuring while limiting the extent of forbearance.”

In the next few days, said Mr. Rajan “We hope to be able to announce two key relaxations: one is a move towards 5/25 restructuring for existing projects which are standard and also to allow banks to take equity in restructuring to a great extent than they currently can. We are discussing the price at which such conversions can be done with SEBI as of now.”

Dis-inflationary process

“We are certainly seeing the dis-inflationary process, with global developments on the crude oil etc being positive for India. We want to get more certainty about the pace of the dis-inflationary process, get a little more sense of some developments on the fiscal front etc,” said Mr. Rajan.

As of now, and this is why the policy stance remains unchanged, “We think that we are well set at this point but as the information comes in our sense is that if it goes according to expectations then it will be towards monetary accommodation. The stronger the information, the sooner the accommodation,” he added.

“We want to make sure that this (dis-inflationary) process is well underway. When we are certain, we will act. We have had a couple of months after 4.5-5 years of high inflation.”

So, according Mr. Rajan, “We want to make sure that this is for real and especially because we don’t intend to flip-flop again if the world changes dramatically or the circumstances change dramatically we will have to respond. But we don’t want to follow, sort of, every piece of information up and down. We would rather change (policy stance) and change for good.”

On the fiscal front, Mr. Rajan said that “It is one of the number of things that we have enumerated that we would like to have more information on and at this point it is whether we can achieve the targets set for the current budget and not the next one. Obviously, we would also like to see a good budget going forward. Our discussions with the government suggest that things will be on track and of course, what we are looking at is for that to happen.”

Corporate India

“I think there is a misconception in corporate India that the central bank is not concerned about growth.” According to him, it is a misconception because the fundamental way to get sustainable growth in this country (and we are talking about growth this quarter, in fact, monetary policy will not affect growth this quarter, it acts with a lag of 3-4 quarters) is to have moderate inflation.

Savers vs Producers

The big fight between savers and producers has been that “savers are seeing high inflation and don’t want to save in financial assets. Producers are seeing low inflation and say oh my God interest rates are so high, how can I invest. How do you bring the two together? It is by bringing inflation down otherwise we are going to have this (situation) again and again”.

“I think it is very short-sighted when people comment that you are not helping growth this quarter. We are not talking quarters, we are talking about years of sustainable growth. In order to get that you need to fight inflation, beat it and then you can get sustainable growth. So, I think that is the message that has to seep through. The RBI is certainly not against growth. We want the strongest growth for this country that is possible and that means creating the framework that will make sustainable growth possible.”

On banks cutting rates

“It is not my job to tell the banks what to do……I have only said that they are not cutting rates. All I am saying is, even though the rates have come down, they have not passed it on.”

So, said Mr. Rajan, the transmission process is still not working as significantly. Therefore, one would imagine that if past falls in short-term rates have not been passed through, an additional rate cut is only a mild chance. “I do believe that there is a signaling effect. And I do believe that once banks are confident that rates will come down and stay down, they may start passing through more. Now for us to reach that point where we can signal very strongly about interest rates, I think today is premature but I have laid out the conditions where we think we will be in a position to move.”

Aims to keep real interest rates at 1.5-2 per cent

The Reserve Bank of India will aim for a real interest rate of 1.5 to 2 per cent over the long-term, Governor Raghuram Rajan said here on Tuesday.

The central bank would gradually move towards a new monetary policy structure next year, he said.

The government is expected to amend the RBI Act by early next year to incorporate a monetary policy committee that gives voting rights to officials both within and outside the central bank.

The comments come after the RBI kept the repo rate on hold at 8 per cent on Tuesday. — Reuters

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