Slowdown will impact asset quality: Subir Gokarn

RBI Deputy Governor Subir Gokarn says credit-deposit growth mismatch for a longer period could put pressure on liquidity. He speaks to Parnika Sokhi and Abhijit Lele after the first quarter review of the monetary policy. Edited excerpts:

Why is deposit growth not picking up, even though interest rates are attractive?

There is a concern that deposit growth has significantly been slower than credit growth for a prolonged period of time. This was one of the issues we discussed with bankers today. We haven't got a fix on it yet.

Some people argue it is because of the real rate of return on deposits turning negative; there is a fiscal asymmetry between bank deposits and other instruments. But the long-term issue is that, ultimately, both credit growth and deposit growth have to be in line with each other.

When that gap widens, we have liquidity pressures and we have been dealing with that from late 2010. While we can deal with short-term liquidity pressures, long-term issues remain. We may give a projection in the next quarter's review.

The banking sector continued to see slippages in the first quarter. Will the concerns on asset quality increase?

A part of this slippage is due to macro conditions and a reflection of the business cycle. So, if growth is going to slow, it will have a bearing on asset quality.

A part of it is sector-specific, like power, steel, textile and aviation. As the sector-specific issues get resolved, some of these problems will go away.

 You have rolled back some of the forex restrictions today. Why?

The broad context is that market players saw some of our actions from November as regressive. These were generally a rollback of an otherwise general direction of liberalisation, of creating more space for market participants.

We were in constant dialogue with stakeholders on whether these were making a positive difference or they were imposing more pain. In response to some of the feedback that we got as early as December, we made some changes. Since then, some degree of stability has returned to the market.

We thought we could use this opportunity to fine-tune some of those restrictions to bring back more space for market participants.

Is the exchange rate stable now?

The rupee volatility has started showing signs of coming down. We felt at this point, opening up some of these restrictions could actually contribute to more effective management and containment of volatility.

If you take the pattern that we have seen in the last month or so, the range of parameters on volatility suggests that some stability has come.

Has India's vulnerability to the Euro zone crisis grown?

I think we have to look at vulnerability from the perspective of long-term integration of the Indian economy into the global economy.

By that yardstick, we have integrated very rapidly. Our gross international transactions - if you take balance of payments - are more than 110-120 per cent of GDP, if you add both sides. This would suggest that anything is happening globally is going to impact us.