India Inc and many political leaders have long been demanding a rate cut as growth has been trending down.
Trashing India Inc's incessant criticism that RBI is not reducing interest rates, Governor Raghuram Rajan on Tuesday accused them of being myopic and asserted that the central bank is for the ‘strongest possible growth’.
"I think there is a misconception in corporate India that the central bank is not concerned about growth," Rajan said and underlined that the fundamental way to get sustainable growth is to have moderate inflation.
Addressing the customary post-policy press briefing, Rajan said, "We are not talking about growth for this quarter.
“We are talking about years of sustainable growth. To get that you need to fight inflation, beat it and then you can get sustainable growth."
Asserting that RBI is not against growth but wants the strongest possible growth, Rajan pointed to the incessant fight between the savers and producers and said, "The big fight between savers and producers has been that savers are seeing high inflation and so can't save, whereas producers are seeing low inflation and say interest rate are so high and how can they invest.
"How do you bring these two together? By bringing inflation down. Otherwise, we are going to have this high inflation and low growth scenario again and again.
“And so, I think it is very shortsighted when people comment that you are not helping growth this quarter," the Governor said in combative tone.
India Inc and many political leaders have long been demanding a rate cut as growth has been trending down.
The GDP grew at 5.3 per cent in the second quarter of this fiscal as against 5.7 per cent in the first quarter.
Rajan said RBI is also in the process of creating a framework which will make the sustainable growth possible.
"I would say bare with us (for some more time) and hopefully if we can reach there and stay there.
“We will produce many years of strong growth for corporate India," Rajan said, adding that RBI has a projection for a steady pickup in growth going forward.
"The government is doing things it needs to do in the short term which is to fix the power, mining especially coal, iron ore sectors, and also make land acquisition easy so that some of the large projects can go on. Doing some of these will also bring down the number of stalled projects," he said.
He said efforts of the RBI and the government to bring down inflationary expectations have resulted in bringing down the yields on long-term bonds by 60-70 basis points since July, which has resulted in fall in cost of borrowing for corporates.
Even the short-term rates have eased on better liquidity management.
"Those are positives for corporate India. They should accept that there has been some positive development," Rajan said.
Admitting that there is a confusion about what rate the RBI is responsible for and what rates corporate India is responsible for, Rajan said, "The immense risk premium that is being demanded of some corporates due to their high leverage or the risk that they have taken and because of their inability/unwillingness to repay, should not be attributed to the RBI."
"What we control is a risk-free rate. What they (corporates) can control is the risk premium that is demanded of them," Rajan said and asked corporates to work on their risk premium that they have to pay.
The Governor said the transmission of the monetary policy has not taken completely as banks have not passed on the benefit of lower interest rates to borrowers.
"The transmission process is still not working as significantly and therefore one would imagine that if past falls in short-term rates haven't been passed through, then additional rate cut is only a mild chance," Rajan said.
"I do believe that there is a signalling effect and I do believe that once banks are confident that rates will come down and stay down, they may start passing through more," Rajan said.
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