interview | Shaktikanta Das Economy

Lower rates will spur credit flow and revive growth: Shaktikanta Das

Reserve Bank of India (RBI) governor Shaktikanta Das smiles during a press conference at RBI headquarters in Mumbai on August 7, 2019. - India's central bank on August 7 cut interest rates for the fourth time this year, as New Delhi battles sluggish economic growth and high unemployment. (Photo by Indranil MUKHERJEE / AFP)

Reserve Bank of India (RBI) governor Shaktikanta Das smiles during a press conference at RBI headquarters in Mumbai on August 7, 2019. - India's central bank on August 7 cut interest rates for the fourth time this year, as New Delhi battles sluggish economic growth and high unemployment. (Photo by Indranil MUKHERJEE / AFP)   | Photo Credit: AFP

Slowdown is perhaps cyclical, not structural; there is room for structural reforms to be undertaken, says the RBI Governor

During the post policy media interaction, RBI Governor  Shaktikanta Das explained why the bank announced an unconventional rate cut of 35 basis points (bps).

Why a 35 bps rate cut?

According to the assessment of the MPC (monetary policy committee), based on demand conditions etc, a 25 basis-point [rate] cut was inadequate, while a 50 basis-point cut was excessive. That is why we took a balanced call.

What are the underlying issues, according to the RBI, that are hurting growth?

There is a demand and investment slowdown; both put together having a dampening effect on growth. We have reduced the growth projection to 6.9% with risks slightly to the downside. Our understanding is that, at this point, it is perhaps a cyclical slowdown, not really a deep structural slowdown. Nonetheless, we have to recognise that there is room for structural reforms which needs to be undertaken.

You have said a 50 bps rate cut is excessive. What is the real rate you are working with?

This is not the time to look at real interest rate. Currently, our focus is to fill up the output gap, that is the determining factor for the MPC’s decision.

And also, there is also a gap in inflation.

What is the RBI’s view on dollar bonds?

We have conveyed our views internally to the government. [The] Government is consulting the Reserve Bank on this issue. For the moment, I would leave it at that.

Where do you see the recovery in growth coming from?

Our expectation is — and I am saying this after our interaction with the government — the government will take necessary, further measures as may be required to deal with various issues. With the RBI cutting interest rates, the credit flow will revive. Therefore, growth numbers will pick up.

What steps will the Reserve Bank take to ensure faster transmission of monetary policy rates?

The system is flush — if I can use the word — with liquidity. So, therefore, the rate cuts done by the RBI and the liquidity which we have injected, both have started the cycle of rate cuts so far as new loans from banks are concerned.

We have a sense that there will be improvement.

The RBI is monitoring it regularly. And in future, whatever steps are required for faster transmission of rates, the Reserve Bank of India will not hesitate to take those steps.

Despite interest rate cuts, there has been a demand slump. What stopped you from a 50 bps rate cut?

In policy making there is something called ‘you take a call.’ When you take a call, there is something more than mere numbers, which is beyond what is there just in the data. So, the MPC, in its considered opinion, took the view that it will be 35 bps rate cut.

What is so sacred about multiples of 25 bps? It has just been adopted and has become a convention. So, therefore, when you do something out of convention, too much should not be read into it. So, it is a judgement call that the MPC has taken.

The rupee is under pressure. Will it impact RBI’s effort to push if it depreciates further?

On the rupee, it won’t be appropriate for me to give some kind of forward guidance.

I will just repeat the stated policy of the RBI that it is the RBI’s responsibility to manage volatility of the rupee.

While projecting CPI inflation, what is the rupee assumption?

MD Patra (Executive Director): We take the prevailing exchange rate, average of the relevant period.

(Mr. Das adds: “Roughly, we take previous two weeks.”)

Is a CRR (cash reserve ratio) cut on the table? How long do you see the rate easing cycle continuing?

At the moment, there is no proposal for a cut in the cash reserve ratio. As far as future rates are concerned, you have to wait for the incoming data and [watch] how the macroeconomic situation evolves.

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Printable version | Jul 3, 2020 3:25:15 PM | https://www.thehindu.com/business/Economy/lower-rates-will-spur-credit-flow-and-revive-growth-says-das/article28872130.ece

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