Sharp rate hike would have disrupted pace of recovery,says Subbarao

Dr Rangarajan is by far one of the biggest gurus on monetary policy in the country. But what I want to say is that in hindsight it’s possible to look back and say what would have been if I had done this. If we go back to 2009 and much of 2010,we were fighting inflation as we were trying to support recovery. So a big adjustment on the interest rate side would have disrupted the momentum of recovery. So we have to keep that in view. It (the RBI’s approach) had a rationale,justification and in view it has served our purpose well.

Do you think the RBI has to do more than its fair share to contain inflation?

To some extent,that would be a fair assessment. As much as there is fiscal deficit,monetary tightening has to be that much more. If fiscal deficit has been low,inflationary pressures would have been lower monetary tightening probably would have been less. It’s a problem all countries have. It’s not unique to India. The question is whether we had to tighten on the monetary side to compensate for fiscal expansion. See Ben Bernanke in the US. They are more accommodative on the monetary side to compensate for fiscal tightening. So the conflict between fiscal and monetary is across all jurisdictions.

Investment slowdown seems to be the dominant feature of the monetary tightening. Do you think revival of the growth momentum will take a while?

I have no idea about the time frame. But I do hope that the response would be quick… because until six months ago,banks were telling us that potential investors have been talking to them. Only in the last six months has there been some regression in the process. If investment plans are ready it’s a question of credit appraisals,sanctions and disbursement of credit. The action time should be relatively short.

Are you worried about recent rupee depreciation? All your work has been undone…

Every factor that adds to inflation is a matter of concern. The rupee has depreciated by 10 per cent between July and mid October. It has added to inflation. It has offset the modest decline in commodity prices. In the last a few days,global commodity prices have inched up… that’s a concern. If you ask me if I’m happier if there was no depreciation,certainly,yes.

The problem of non-performing assets (NPAs) seems to be back,especially in the SME segment. Do you think another NPA cycle has emerged?

If you look at the NPA numbers in June 2010 and June 2011,there’s a slight improvement. The headline NPA number is reasonable. However,there are some stress factors — high interest rates,demand moderating,asset quality coming. We should be sensitive to them. I am sure that banks will be addressing that problem.

You suggested recently that the monetary policy should be formulated by a committee,and not by the Governor alone. What’s the progress on this front?

I said that’s the way to go forward. We should also go to a monetary policy committee. But we must fulfil certain necessary conditions for that purpose. Fiscal deficit has to come down.

Are you concerned over the decline in capital flows?

Well,concern is the wrong word. We keep monitoring the short-term flows… and the ability of our banking system to meet the higher cost of short-term requirements.