Budget will help India become a powerhouse, says Rajan

Raghuram Rajan, the RBI Governor, spoke on a range of issues during an interaction with analysts on Wednesday, after cutting interest rates.

Edited excerpts:

On future rate cuts

It was not a commentary on not being able to cut rates to the core.

I was not talking about the current inflationary path and the current monetary policy.

It was  about the general sense in which we do not match the industrial countries.

On the unscheduled rate cut & the proposed Monetary Policy Committee.

Let us wait for an MPC to be created to decide when it will meet.

(Our) technical advisory committee does give advice before a monetary policy review, sometimes through a physical meeting, sometimes through an email discussion.

At times, when we feel the need to move simply because we have a sufficient accumulation of data and for a variety of reasons, we don't consult the TAC.

We move our own.

Rupee & exchange rate

I have said an excessively strong rupee is undesirable, which I am sure you will agree with.

The fact that it is undesirable doesn’t mean we will necessarily act against it, if the situation were to arrive.

I believe what we can do is to perhaps act against temporary undesirable volatility but it is very hard for us to act on a sustained basis to maintain a (particular) value of the rupee.

Timeframe for inflation targeting

About two years after January 2016, effectively.

So, by the end of January 2018, we should have breached the mid-point of the band (four per cent).

Liquidity

I think the way we think of it is to separate liquidity into two components.

One is permanent liquidity, the rate at which we expand the sum of our domestic bonds plus foreign assets.

We think that is a more permanent asset that we are buying, financed by the permanent liquidity provision into the market. We want to grow that at a rate consistent with our inflation forecast, as well as real growth of the economy.

The second element is the temporary shortages of liquidity which emerge from things like government payments, government balances, etc, which change over time, and seasonal factors like festivals, etc.

We try and accommodate that through the short-term repos -- overnight repos, term repos and so on.

In March, there is usually some tightness as banks accumulate and stop lending to one another, accumulate reserves and so on.

At such times, we tend to provide for more short-term liquidity, knowing there will be a large reversal at the end of the month.

That is broadly our strategy.

Four per cent consumer price inflation as midpoint

The way we think about this four per cent midpoint is if you look at the industrial countries, they are seeking for the most part a two per cent nominal interest rate.

If we say, on top of that we have a two per cent productivity advantage as we catch up in growth, then a four per cent inflation rate on our side would tend to keep our nominal exchange rate at pretty much a level vis-a-vis industrial countries.

That is the thinking behind four per cent.

Quality of fiscal consolidation

I think the statement we issued makes it clear that there is a possibility the actual fiscal consolidation could be higher than the numbers mentioned.

But we have also emphasised on the quality of consolidation, the emphasis on investment rather than substantially more consumption expenditure.

Function of (the proposed) public debt management agency

This is a question you should ask the government and not us.

It is an agency which has been mooted for some time by the Financial Sector Legislative Reforms Commission report and I think the government has expressed an intent to bring it about.

As of now, it is only an enabling clause.

We have to see what precise form the agency takes.

My sense is when it finally emerges, it will have a lot of RBI presence and support, to avoid re-inventing the wheel.

But there is still a long time to go before a precise form.

A task force is formulating the structure and I think we are at least a year or two away from more details.

Regulatory powers on debt market being shifted from RBI

There are indeed some clauses in the Finance Bill referring to this.

But the finance minister’s speech did not contain any reference.

The speech generally flags the important actions of the government.

I am not worried that this will happen.

Capital account control a policy, not a regulatory matter

As the finance minister has said, this is an area where we talk to each other.

On precisely who has the power to issue the final regulation, the consultation does take place and my sense is that it is reasonable to say that equity areas are perhaps where the government should have the framing right.

But the consultations that happen on these issues between RBI and the government will continue.

I don't think we ever do anything in our regulatory framing without the full consent of the government and I presume it will be vice versa.

‘Make in India’ or ‘Make for India’

I don't think it is a real debate between this or that.

You are making in India, you will make for India and for the outside world.

It’s not one against the other, a point very few seem to have understood.

In fact, given that exports in a country are always a fraction of domestic production, you are going to be making for India.

The notion that there is a contraction between these two is something I do not understand.

I can't pick out places in the Budget that are for Make in India.

Undoubtedly, the entire thrust on medium-term reforms are going to be very helpful for making in India.

But if you want specific items to be singled out, that is a question better posed to the chief economic advisor or the ministry of states.

It is not something we should respond to in great detail.

But I have no doubt that the various medium-term measures proposed in this Budget will certainly help the country become more of a powerhouse in the world. From that perspective, it is a very good Budget.

Image: RBI Governor Raghuram Rajan; Photograph: Danish Siddiqui/Reuters