International Business
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'We've handled crisis much better than anyone else in the world'
Rakesh Mohan, who was appointed Deputy Governor of the Reserve Bank of India in September 2002, moved to North Block two years later as secretary, department of economic affairs, during P Chidambaram’s tenure as Finance Minister, only to return to RBI after eight months. Mohan, who is taking retirement from the central bank seven months before his tenure is due to end, will take up a professorial appointment at Stanford University from June 15. In this interview, he spoke on a range of issues about the challenges he faced during his stint at the central bank and the journey from handling the real economy sectors to monetary economics. Edited excerpts: - Higher interest on bonds sans bank guarantees - ATF prices raised by Rs 108 per kilolitre - HLCC meets to give Budget suggestions - Govt set to fast-track borrowing to avoid interest rate pressure - No comprehensive review of FDI norms: Sharma - Stop guarantees for corporate debt issues: RBI to banks Why are you leaving RBI before your term ends? My term as Deputy Governor will end in another seven months and the Stanford University offer was too good to refuse. So I had to take a call. It would be quite satisfying to guide doctorate students and be associated with Stanford’s Centre for International Development. How do you look back at your tenure in RBI? Prior to joining RBI, I never really had any particular interest in monetary economics. I was mostly involved in real economy sectors such as urban development, industrial and technology policy, petrochemicals, infrastructure, and the like. I was also part of various committees on diverse areas such as small and medium scale industries, railways, infrastructure, competition policy, etc. Later, I got involved in fiscal policy making and the Budget as the Chief Economic Advisor in the Finance Ministry. A substantial part of some of the reports I was associated with was devoted to financing of projects. For example, the Abid Hussain Committee report on SMEs had talked in detail on financing of SMEs. Among the key problems of financing SMEs has always been the high transaction costs incurred in risk assessment. Hence the report recommended setting up of credit information companies. That was in the mid-1990s. But it is only now that we are actually in the business of licensing such companies. My time in RBI has therefore been a voyage of discovery since I didn’t have a background in monetary economics earlier. Understanding the functioning of monetary policy has been a great learning process. The best way to figure out whether what we have done was appropriate is to look at the outcomes. We have measured the outcomes from 2003-4 to 2008 and feel quite gratified with the results. During this period, we have had the highest growth and lowest inflation for any five-year period since independence, a reasonable degree of financial stability, high credit growth, and sustained improvement in the quality of our banking institutions on all metrics. We must have done something right. But the period you talked about saw high growth, high liquidity and low inflation in other parts of the world as well. Yes, but if you look at the numbers, we have been among the best performers along with China. Some countries had low inflation, but no growth. Virtually no other country had such high growth as ours. If you compare our performance on inflation among the emerging market economies, we were clearly among the best. I have nothing to say if some people argue that it was pure coincidence and that monetary policies had no effect. Please also remember what RBI does is not pure monetary policy. We do regulation of banking and non-banking finance companies, regulation of the government securities market, running of the government’s debt management and also what is now called monetary policy in the garb of only interest rate-setting. To my mind, the outcomes we have had are a confluence of all these functions along with reasonably sensible fiscal policies over this period. I have always maintained that we can achieve satisfactory results only if we have close cooperation between the monetary and fiscal authorities. But this period also saw increasing tension between the finance ministry and RBI. That’s been there in every country and in every period, though the issues may have been different. So I don’t think that was anything new. If you read RBI’s history, the whole issue of ad hoc issuance of bills and automatic monetisation has been a constant source of tension between the fiscal and monetary authorities. One of the RBI governors in fact resigned in the 1950s because of extreme tension on this issue between him and the then finance minister. This is normal because these two segments have different functions. Should you shed some of those functions? For example, there has been a view that RBI should shed the banking supervision role. We are fortunate that RBI does carry out all these functions. One of the most fascinating things of central banking is that there have been different views on the same issues in different times. There is nothing wrong with that as one has to react to the changing context. For example, before Gordon Brown decided to give autonomy to the Bank of England, the country’s monetary policy was made in the Treasury. This is an example of how views change. Banks haven’t listened to RBI on interest rate cuts – at least not to the extent the central bank would have liked them to. What’s your view? It is not proper to say that banks are not listening to RBI as we don’t operate under an administered interest rate regime. Banks don’t have to listen to RBI, which has to work through the monetary transmission mechanism. So the question is to see how effective this transmission mechanism has been. The answer to that is interest rates have come down to a certain extent. But this has not been to the extent of the policy rate cuts. I agree, but the RBI policy statements have clearly explained why that has been the case. It is true that there is room for further cuts in bank lending rates, but one shouldn’t forget that banks have to consider their own cost structure and their risk assessments of borrowers. You are saying you can’t force the banks, you can only signal. So why don’t you signal harder and cut the policy rates more? I can’t comment on whether RBI should or should not cut rates further as we don’t give forward guidance. What I would say is that when there is a large difference between the prevailing deposit rates and the floor, it takes time for the transmission mechanism to work. However, we have seen deposit and lending rates coming down over the last six months. At the same time, we should also understand that given the economic slowdown, it’s not unnatural for banks becoming more prudent in their risk assessment. What do you do if what you wanted as an end-result in terms of interest rates hasn’t materialized? I can only say similar efforts haven’t succeeded even in the most advanced countries where policy rates have come down to zero or near zero and the central banks have increased their own balance sheets by a factor of 250 per cent. All the banks have done is to put more money in their reserves with the central bank. Would you agree with the statement that we have one of the highest real interest rates in the world? It’s not very easy to measure the real interest rate in the country. It’s different for borrowers and for depositors. For example, if you talk about industrial borrowers, their real interest rates are connected with the wholesale price index. For them the real interest rate can be deemed to be high at present. For depositors whose inflation measure is nearer the consumer price index, the real interest rate is negative at present. Another way of looking at it is this: Judging from the experience in the last 10 years, the expected inflation rate is 4-5 per cent. From that perspective, the interest rate for both depositors as well as industrial or commercial borrowers is not high. What rate do you think commercial borrowers are getting their money at? The weighted average lending rate is around 10 per cent. This has usually been below the Benchmark Prime Lending Rate. Please remember that over 70 per cent of lending is being done at rates below the BPLR. Lending to the agriculture sector has been fixed by the government at 7 per cent; similarly, the interest rate can’t be more than BPLR for all loans up to Rs 2 lakh; export credit has to be BPLR minus 250 basis points etc. If you take all these things into account, then the weighted average lending rate is nearer 10 per cent. But it’s true that there are some borrowers who get loans at much higher rates. I have said quite often that I don’t quite understand the very wide dispersion in lending rates in India. So what are the changes you would like in the monetary policy framework to make it more effective? I would answer that in two ways. One is that the process that we went through in the 1990s of more and more interest rate deregulation has to continue. The fewer the distortions in the system in terms of administered interest rates, the more effective monetary policy will be. However, in our system, administered interest rate interventions take place since you don’t have enough information for adequate risk assessment. That problem on the lending side has got to be solved by credit information companies. Then you go to the depositors’ side. There is a similar issue there. With the lack of adequate social security, people with low to middle incomes want an assurance of some kind of risk-free rate. So, two issues arise from that. As you improve social security, pension systems etc, you will presumably have less of a need for administered interest rates.Pages: [1] 2 3