MUMBAI : Reserve Bank of India governor Shaktikanta Das said the central bank is conducting an internal review of the monetary policy framework and will hold a roundtable with experts in June to see if the framework needs tweaking. During a fireside chat at the 13th Mint Annual Banking Conclave in Mumbai, Das also said that any generalized loan waiver is credit negative.
You had said in a recent interview that you are looking at review of the monetary policy framework. What kind of review are you looking for?
Das: We have not reached certain conclusions that this is how it should be. We have said that the monetary policy framework has worked well. And inflation has been within the mandated target of 4%, plus or minus 2%.
It has remained within that notwithstanding the recent hike due to food inflation and vegetable prices. It’s a new experience for India. Three-and-a-half years have gone by. It’s time to review how it has worked. That is why I said we will review the framework and, if required, we will approach the government.
Is the inflation targeting framework too rigid? It does not take into account RBI’s earlier mandate – growth and financial stability. Is the framework deficient in promoting growth and financial stability?
Das: The present framework says maintain price stability keeping in mind the objective of growth. So, therefore, even the present policy provides the due focus to be given with regard to growth.
Financial stability has always been the underlying theme and I have said it earlier also. In the minutes of current monetary policy also, I have mentioned that a higher growth trajectory will also bring in financial stability which is required very much for an orderly growth.
The present framework gives due focus on growth. It’s a question of how you apply it. Financial stability has been the underlying theme of all central banks. Earlier we had a multi-target approach of monetary policy.
But it becomes too complicated with the same instrument being used to pursue multiple targets. It’d be an ideal situation if you have one target and with one instrument you are trying to follow. While approaching that target, growth has to be factored in.
So I think monetary policy gives enough flexibility. It’s a flexible inflation target that we have. By flexible target when you expect there is space for cut.
All through 2019 RBI miscalculated slowing GDP growth. You have also said that estimating output gap is a challenging task. Part of the reason is lack of access to clean and hygiene data. What are you planning to do?
Das: Last year, 2019, has been an unusual year. When we started the year, nobody thought growth would be 5%. It was a complete surprise for everyone.
Having said so, RBI was the earlier ones who noticed that growth momentum was slowing down. We were not as surprised as others as we moved in subsequent months; in February 2019 we saw that growth momentum was slowing down and we started cutting rates.
So far as data is concerned, we go by Central Statistics Office (CSO) data. We have said earlier also that there is no reason to doubt the credibility of data. I mean RBI does many surveys and we have tried to fine-tune the methods of surveys also.
We are undertaking a lot of discussions with agriculture market in various regions of the country. In every situation when we are dealing with the real economy, you have to be prepared for unforeseen developments. At the moment there are green shoots which are visible and we have to see how sustainable and durable they are.
You said the difference between good bank and bad bank is governance. In the last couple of years we have seen the difference between good bank and bad bank come to the fore. But even the good banks have peculiar problems. One of the good banks has a problem with promoter shareholding. The other good bank has managerial retirement happening at 70. Finally there is some resolution with the first bank where promoter shareholding has been resolved. But I was wondering in a country where Prime Minister can get appointed at 81, why would somebody in his prime be forced to retire at 70?
Das: I’m a big fan of the game of cricket. I do, perhaps as with regards to real economy, I do understand some nuances of the game of cricket. When Sunil Gavaskar retired, in his farewell speech he said you must retire when people ask why and not why not.
So I think that answers the second part of your question. Individual banks I don’t want to comment on. Our efforts are to be proactive to engage with financial sector players and banks. We don’t try to talk from a high pedestal that ‘I’m the regulator and I can blow the whistle on anybody’.
We like to take them into confidence and engage with them. The focus is to create an ecosystem. After all the job of a referee is that all players play to their full potential.
So therefore we do engage with various banks from time to time and whatever challenges they have, we look at it.
With respect to high NPA in the banking industry, what are your views on farm loan waivers?
Das: I have commented on this twice earlier. Any amount of generalized loan waiver is credit negative. It definitely undermines credit culture. It also affects the farmers’ capability to access loan for the next season. So therefore any generalized loan waiver definitely undermines credit culture. Any kind of relief to the farmers due to natural calamity or other distress, ideally, should always be targeted. What we stress with the state governments is that the write-off amount should be released immediately to the banks. Unless banks get the money, the capability of banks to provide loans for the next crop cycle will be affected and the individual farmers who benefit out of the write-offs, they will not get the loan write-offs. Any loan waiver should be targeted and should be specific to certain situations.
(The last two questions were from members present in the audience at the conclave.)
