Can't cut rates mechanically every time: RBI Governor Shaktikanta Das

Topics RBI MPC | Shaktikanta Das | RBI

RBI Governor Shaktikanta Das | Illustration: Ajay Mohanty
After the bi-monthly monetary policy committee (MPC) meeting, the Reserve Bank of India (RBI) Governor SHAKTIKANTA DAS spoke to the media on the rate cut, transmission of interest rates, the non-banking financial sector, and the technical glitch at one of India’s top banks. Edited excerpts:

Why didn’t you cut rates if you are expecting inflation to fall and range between 3.8 per cent and 4 per cent by July? What will you look for in the Budget and what will make you cut rates in February?

There is a case of looking through the current spike in headline inflation, which is due to food inflation. Our calculations show that food inflation in the fourth quarter (Q4) of 2019-20 will remain high, and its moderation is dependent on several factors. Core inflation is expected to remain in the current zone, but there are factors related to telecom, which may have some impact on core inflation. 

The MPC would like to have greater clarity on that. Inflation targeting is the RBI’s primary objective and it is also required to keep the objective of growth in mind and that has been given due weight. The MPC has given unambiguous guidance that there is space for further rate cut and the RBI will act if the situation warrants. We have seen certain green shoots regarding growth, but it is too premature to take a view as to how things pan out. 

With regard to the Budget, it is not a question of worry that there will be more fiscal deficit. We are just awaiting greater clarity. In the case of growth failing, I have said that the fiscal and monetary authority will keep working in greater coordination. The government has taken several measures and the RBI has also reduced its rates subsequently and liquidity has been in surplus. The full impact of the rate cut is also playing out. We should allow some more time for the rate cuts to play out. Therefore, the MPC decided to take a temporary pause.

Could the committee have opted in favour of growth right now?  

I will not dispute that. But the timing of rate cut is also very important to optimise the impact of 135-basis point (bps) rate cuts. Let its impact play out even more so that we can maximise the impact. We can’t keep cutting rates mechanically on every occasion.

The government has exhausted on the fiscal deficit front and as revenue growth is slow it doesn’t have enough room to support growth. It is looking towards the RBI and you are saying that you are looking at the Budget. Who will take responsibility of growth?

This responsibility is for both and we will keep working towards it with great coordination. You are wrong to say that we are looking at each other. Growth is a national issue. Second and third quarter always has high fiscal deficit because revenue inflow picks up in Q4 and so do other tax collections, and other expenditures are evenly balanced throughout the year. We will have more clarity after looking at what the government does to push growth. 

What kind of data do we have on rural and urban income growth? Since gross domestic product growth rate has been cut, is there a fear of job losses?

We expect a gradual recovery in income growth right into the second half of next year, based on our surveys conducted regularly with two-month intervals.

The policy statement is at odds with the action that you have taken, and is it the job of the regulator to take a troubled non-banking financial company (NBFC) to the National Company Law Tribunal (NCLT)?

As a regulator, the RBI’s role starts and ends with referring it to the NCLT. Thereafter the insolvency professional and the committee of creditors, and then the NCLT takes over. So, our goal is only to analyse the situation and record it. Let us look at the whole situation in a pragmatic manner. We cannot add greater disruption and uncertainty to the system. The regulator is best placed to assess the current state of affairs in NBFCs as it is monitoring and supervising them. 

Overall, it is the RBI’s financial stability and development council which looks at financial stability, but the RBI as the regulator of banking and non-banking and other sectors has the prime responsibility with regard to financial stability.

Is there a concern that not only in bank credit but also in money market the transmission of RBI’s rate cuts has been slow?  

The 10-year G-secs rate is guided by several factors. It depends on market perception on growth, the fiscal numbers. Against a 135-bps cut by the RBI, 89 bps transmission has happened since February. It is for market to take a call on what kind of risks they perceive and based on that it will play out. This is something that will not guide our decision but it is watched and kept in mind while taking a decision. 

The term premium has been coming down and if you go back a month or two, then you will see even the 10-year G-sec has actually transmitted fully.  

There was a large outage on one of the private bank’s mobile banking and netbanking channels. Will the RBI consider a framework for penalising such inefficiencies?

We are cognisant of the problem. It happened on December 2 and it was because of technical glitches which were restored on December 3. 

On Wednesday there were some media reports that customers are not able to access digital banking services of that bank. We checked again and it has been restored fully. But, our team has gone to identify the reasons and find out what we can give them as directions.

Is there a fear of entering the negative real interest zone?

I don’t want to comment on real interest rate issue because monetary policy cannot have multiple targets. So when we adjust policy rates, we have to keep in mind how much low it can go keeping in mind inflation.

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