Rajan: We are better prepared to deal with U.S. Fed tapering

Reserve Bank Governor Raghuram Rajan takes questions from The Hindu

October 11, 2014 03:04 am | Updated November 16, 2021 07:15 pm IST - Washington DC

Reserve Bank of India Governor Raghuram Rajan.

Reserve Bank of India Governor Raghuram Rajan.

On a day India was singled out at the International Monetary Fund for praise for being the emerging market economy that has covered maximum ground since mid-2014 to prepare for the impending reversal of the US Fed’s easy Monetary Policy also called Quantitative Easing and at the same time data showing weakening industrial production growth was released back home, Reserve Bank Governor Raghuram Rajan took time out from his meetings here in Washington DC to take questions from The Hindu .

The Index of Industrial Production growth data came in earlier today lower still at 0.4 per cent in August from 0.5 per cent in July. It's a five-month low. Manufacturing growth is -1.4 per cent in August against -1.1 per cent in July. There’s a stable Government at the Centre, it has announced pro-business and pro-investment policies and intentions. When will we see a sustained pick up? What is keeping the growth momentum down now?

I will not comment on latest data…We have been saying and you have to accept that recoveries are not straight line recoveries… there is volatility around the general trend… investment is yet to pick up on a strong basis [even though] we are seeing signs of the coming together of conditions for it… there will be slight weakening compared to the first quarter [or April to June] in the second [or July-September] and third quarter [or October to December] but beyond that we will hopefully see some strengthening of the economy.

At your press conference in Delhi a few weeks ago you had said that despite two Statutory Liquidity Ratio cuts corporate demand for bank loans wasn’t picking up though overseas borrowings were up. Would you say investors are watching cost of borrowing more than risks associated with the business environment and that is what keeping investments down?

Some firms may have natural hedges. They may believe that borrowing unhedged gives them a lower cost of finance and therefore they do that. Some maybe taking a risk by not having natural hedges and borrowing unhedged anyway and thinking they have a low cost of finance. Those kind of corporations typically find out that they have a mistake when there is volatility in the exchange rate. So there may be some good reasons for borrowing ECBs [External Commercial Borrowings] and not borrowing from banks but there could be bad results for it. Regardless of what returns from the investment are you would pick what you perceive to be the lower cost of financing those investments. That is what we indicated in the monetary policy statement that some of the lack of credit growth is because they are finding other ways to finance and what we should be thinking about is the overall expansion in credit including bank credit but also other forms of credit.

In its Monetary policy report released on September 30th, RBI said that the consumer expectations for a year later are at the highest level since the financial crisis in 2008. And that business expectations were at an 11-quarter high. Despite the exuberance in these surveys, consumer goods output for April-August shrunk (-) 4.9 per cent against (-) 1.6 per cent. And now, this morning's data shows capital goods output contracted (-) 11.3 per cent in August down further from (-) 3.8 per cent in July. Why do you think the turnaround in investments seen in April-June has not sustained and when do you expect it to recover? Also, in spite of elections expenditure in April-May consumer demand is not picking up. Similarly, despite the initiatives announced by the Modi Government on a more liberal Foreign Direct Investment policy and the invitation to ‘make in India’ you have not raised your GDP projection for this year from the pre-election level of 5.5 per cent. Why are you not buying into the sharp turn in the sentiment?

The point made there [Monetary Policy Statement] is that it takes time for investment intentions to pick up. You may suddenly decide you want to put more assets on the ground. You may decide you want a highway a power plant investment doesn’t take place tomorrow it takes place a fair amount of time before that is realised. So even with all the sentiment in the world investment takes time on the other hand consumer demand with stronger confidence can quickly pick up but to the extent that consumer demand is affected by new jobs that are created by the investment that may take that much longer. So what we are saying is that let’s wait and see things … and remember between our previous statement and our latest statement there was initially more evidence of a bad Monsoon and then more evidence of Monsoon improving. So that was also taken into account.

How much will be the impact of the Supreme Court’s cancellation of coal block allocations on the economy and its growth?

I don’t think we can assume immediately that there will be a negative impact on the GDP [Gross Domestic Product] … Government is taking measures on how it will respond to the judgment. Once those measures are announced we will then have a basis to assess what the losses may be both in terms of the production as well as to the banks if any. So it is too early to make judgements the banks themselves don’t fully know what the effects will be.

Energy policy is important on various dimensions and I think going forward both coal as well as oil are extremely critical given our expanding economy and given the fact that we are generally more energy intensive than developed economies. So we have to find viable sources of energy.

The officials of the IMF have said that among all emerging markets India has covered most ground since mid-2013 to be better prepared for the tapering

I wont say that let them say that but I think that will be a good vindication of what the Government and the RBI has been doing. We were affected in July 2013 but if you look at January 2013 when a number of other emerging markets were also affected we were only mildly affected. Similarly in August 2014 when again there was a lot of turmoil in a number of emerging markets we survived with very little volatility. So, of course it is anybody’s guess what happens when markets fully internalize the eventual rise in [US] interest rates but my hope and expectation is that what we have done both from the Government side as well as the RBI side on preparing that this is something that we are much better prepared for and the investors will be able to distinguish between emerging markets that are much better prepared and have low current account deficits, that have moderating fiscal deficits, that have moderating inflation.

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