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First Bi-Monthly Monetary Policy Press Conference 2017-2018, Thursday, April 06, 2017


Dr. Urjit R. Patel: Good afternoon, everyone.
Thank you for coming to the First Bi-Monthly of the new fiscal year. We take this opportunity
to welcome Mr. B P Kanungo to his first post monetary policy press conference.
Let me start with the Monetary Policy Committees’ decision today. The MPC made a detailed assessment
of macroeconomic and financial conditions, both domestically and globally on the basis
of its judgment on the evolving outlook and the MPC decided unanimously to keep the policy
rate unchanged in this review. The MPC also decided to persevere with a neutral stance
of Monetary Policy. It noted that inflation is set to undershoot the target of 5% for
Q4 for 2016-2017. For 2017-2018 inflation is projected to average 4.5% in the first
half of the year and 5% in the second half with the risks balanced around the inflation
trajectory. The MPC also noted that GVA growth could strengthen to 7.4% in the current fiscal
year from 6.7% in the last fiscal year with risks balanced.
The MPC saw the path of inflation in 2017-2018 as challenged by upside risks and unfavorable
base effects towards the second half of the year. Accordingly, inflation developments
have to be closely and continuously monitored with food price pressures kept in check so
that inflation expectations can be re-anchored. Accordingly, the future course of Monetary
Policy will largely depend on incoming data on how macroeconomic conditions are evolving.
The Committee took note of the reduction in bank lending rates, but saw further scope
for a more complete transmission, including for small savings and administered rates.
In its opinion, along with rebalancing liquidity conditions, the Reserve Bank should endeavor
to put the resolution of banks’ stressed assets on a firm footing and create congenial
conditions for bank credit to revive and flow to productive sectors of the economy.
I will touch on a couple of other issues first before I request the other Deputy Governors
to speak. Regarding the guidance on liquidity, we have provided greater clarity on how we
see liquidity conditions evolving and the manner in which we propose to manage them
with ongoing refinements of the LAF as recommended by the Expert Committee to revise and strengthen
the Monetary Policy framework. The objective is to more finely align the operating target,
the weighted average call rate and money markets with the stance of Monetary Policy.
You may recall that post demonetization there was a surge of liquidity in the system which
the RBI had to absorb to preserve financial stability and ensure unclogged channels of
monetary transmission. At its peak, liquidity absorption was close to ` 8 trillion. The
RBI employed a mix of conventional and unconventional instruments, the first line of defense were
variable reverse rate repos of varying tenors. The incremental CRR functioned as a placeholder
till the enhancement of the ceiling on securities under the Market Stabilization Scheme to ` 6
trillion by the Government. This enabled the withdrawal of the incremental
CRR within a fortnight of its institution. From the latter half of February, the situation
was well under control, greatly facilitated by the wartime pace of re-monetization. This
allowed: a) Progressive removal of withdrawal restrictions
to completely lift off by mid-March. b) Increasing use of our own instruments by
vacating the use of MSS securities. By the end of March, liquidity absorption
was down to ` 3.1 trillion, all of which was held in Reverse Repos.
Looking ahead, and there are details in part B, our endeavor will be to:
1). Drain out the remaining liquidity overhang. 2). Manage the new drivers of liquidity in
2017-2018. 3). Ensure that the normal requirements of
liquidity consistent with the needs of a growing economy are met.
The first step, though not necessarily in chronological order, is the narrowing of the
corridor to (+ and -25) basis points. This is a continuation of the reform initiated
in April 2016 when we narrowed the corridor to (+/-50) basis points in consonance with
the recommendations of the Expert Committee. The objective is to more finely align the
money market rates with the policy rate, bring down volatility and create conditions for
improved transmission of Monetary Policy across the whole spectrum of interest rates. A collateral
benefit that market participant should note is that when liquidity conditions flip to
a tighter mode, the cost of funds through the Marginal Standing Facility will be lower
by 25 basis points. The second step is the assignment of appropriate
instruments to the sources of liquidity. Over the first half of the year we expect government
spending to increase significantly, including due to large redemptions. Mismatches between
the Government’s cash flows, balances and recourse to bridge funding, Ways and Means
overdrafts will be managed by the use of Cash Management Bills as envisaged under the arrangement
with the Government put in place in 2009. Liquidity associated with forex flows will
be managed with securities under the MSS, although the budgetary provision of capping
them to gross issuance is of ` 1,00,000 crores will be an operational constraint that circumscribes
the effective use of the MSS as an instrument of liquidity management, and increases the
burden on the RBI’s own instrument mix, but we will endeavor to manage.
Durable and semi-durable liquidity will be managed with a combination of longer tenor
Reverse Repos and Open Market Operations. Fine tuning operations will continue to be
used to manage day to day mismatches in liquidity demand and supply. We will continue to provide
assured liquidity through our regular operations under the LAF.
The learning experience through demonetization period and the constraints circumscribing
instruments such as the MSS underscores the priority warranted for strengthening the instrument
tool kit of the RBI. It is in this context that RBI has proposed the institution of the
Standing Deposit Facility, drawing upon international best practices and the recommendation of the
Expert Committee. We have been engaging with the government
on this subject for some time and will continue to pursue the matter with them. When the deposit
facility is instituted, market participants have agreed that it will significantly improve
the robustness of the liquidity management framework of the RBI.
I will now turn to the issues regarding banks. An important, perhaps the most important prerequisite
for efficient transmission of Monetary Policy is a well capitalised banking sector that
is able and willing to provide credit at reasonable terms to productive parts of the economy.
The capital can come from either the market or the principle owner for the PSBs, which
is the Government. Having completed the Asset Quality Review of our banks and with several
other critical ingredients in place, viz., the insolvency and bankruptcy code and the
Oversight Committee, the Reserve Bank of India has been preparing actively for the next steps
in an orderly resolution of the bank stressed assets. This will be undertaken concomitantly
with resolution of the weakest bank balance sheets under the aegis of a revised Prompt
Corrective Action framework (PCA), and our new Enforcement Department that has started
its work this week. We reiterate that further creeping forbearance
in the treatment of bank losses is untenable and costly for the rest of the economy. The
measures that will be announced soon to deal with banks stressed assets and weak balance
sheets along with the institutional strengthening that we just alluded to, should help enjoy
confidence in our banking system, restore corporate demand and put us on the virtuous
path of healthy bank credit and industrial growth. Thank you.
I will now request Deputy Governor, Viral Acharya, to say a few things.
Dr. Viral V. Acharya: Just a few quick remarks on the management of surplus liquidity. I
want to stress that with the rapid pace of re-monetization and increase in the currency
in circulation as we have been seeing, we do expect the quantum of durable surplus liquidity
to come down over the next few quarters. However, in the meantime over the next several quarters,
perhaps three to four quarters we do need to manage the quantum of the liquidity that
remains. And as the Governor alluded to, we will employ the whole toolkit that we have
at our disposal within whatever constraints we face, in particular the MSS, longer tenor
variable Reverse Repos, variable rate Reverse Repos, Open Market Operations if necessary,
however in a well caliberated and nimble manner, so as not to have a large price impact on
the G-secs. And in addition, we will keep dealing with the short-term liquidity needs
through overnight and shorter tenor and Repo and Reverse Repo operations.
We are awaiting decision on our preferred facility which is the Standing Deposit Facility,
beyond that we may deploy other tools if our tool kit remains constraint and contingencies
that arise so demand. Thank you. S. S. Mundra: I will little bit elaborate
on what Governor has already mentioned about the issue of asset quality. We have yet to
get the final results of Q4 which has just ended, but based on the figures which were
available for December quarter, the various indicators of the stressed assets they have
further deteriorated during this period, though there had been some positive signals in the
sense that the pace of acceleration of new NPAs, formation of new NPAs had relatively
come down. The Provision Coverage Ratio had moreover remained stable, so resultantly the
cost of credit in Q3 had come down. The overall capital adequacy, particularly of Public Sector
Banks in Q3 was meeting the regulatory requirement, but quite clearly there would be more demand
on the banks’ capital as we have completed the Q4 and going forward also the capital
would be needed for supporting the growth. So, having taken stock of all this, there
had been an active engagement by the RBI as well as with the Government of India and all
the tools which are required, all the options would be open and they would be employed.
I think that there is a clear acknowledgement and recognition that the asset quality situation
in which we are, there is no one size which fits all. There would be case specific instruments
which would be required to be deployed and a number of them were introduced by the RBI
from time to time. So, how to bring the faster implementation of JLF decision, how to enhance
the number or role of Oversight Committees or whether to look at the sectoral or size
specific approaches in achieving these resolutions these are all the options which are being
considered and which are under active discussion. PCA, already Governor has mentioned, we expect
to put the revised PCA framework by mid-April and then it will become operative. There is
another mention in Part B which is, of course, away from the usual question which always
remains in your mind, but as you know that RBI also does a lot of developmental work,
so in the area of financial literacy you will find that pilot project is being launched.
And post pilot, I think there is an ambitious project of nationwide financial literacy campaign
to be carried forward. Thank you. N. S. Vishwanathan: Among the measures that
we announced in Part B, I want to highlight couple of them. One of course, is the decision
to allow banks to invest and participate in REITS and invITS within 20 percent limit of
their capital allowed for equity and equity type instruments. But I think the more important
announcement that we are making is with regard to the branch authorization scheme where we
are moving away from emphasis on a brick and mortar branch to a fixed location where banking
service is available and the idea is that this will enable banks to provide cost efficient
service. Cost efficiency is important to facilitate financial inclusion. We believe that this
is going to result in further propping up of the financial inclusion measures by the
banking industry in general and this might even facilitate for example the small finance
banks which have come on the scene to do their job even better.
B. P. Kanungo: I will refer to just one most important development that has been, a reference
has been made to that in the policy, this is relating to the payment and settlement
system, relating to NEFT actually and this is consistent with the vision document that
we have announced, Payment System Vision Document 2018, and this is the introduction of the
additional settlement batches in the NEFT system. As you know, presently it is on hourly
basis and the batches start from 8am in the morning till 7pm in the afternoon. While the
window of time will remain the same, now we will bring down the periodicity from one hourly
interval to half hourly interval. Consequently 11 more batches will be introduced which will
significantly improve the customer service and increase the efficiency of the NEFT system.
Thank you. Dr. Urjit R. Patel: We will take a few questions.
May I request Mint. Participants: Gopika Gopakumar
Mint: Basically the question is, do you see any
sort of impact coming from excess liquidity on inflation going forward?
Dr. Viral V. Acharya: I think the important thing to keep in mind is that while there
is surplus liquidity in the system it is actually getting drained out through the large quantum
of variable rate reverse repos that we are doing. So, as of now we do not have a reason
to believe that there is sort of leakage happening through that in to the inflation numbers that
we expect. I think the main symptom that we are seeing is the softness of money market
rates at the short end, other than the weighted average call rate if you look at the CBLO
rate, in some cases sometimes market repo Treasury Bill rates, these are softer and
they have been at the lower end of the LAF corridor. And a part of the intension of the
narrowing of the corridor is to anchor these rates closer to our target policy rate. And
as Governor explained, of course this means that even when we are in a tight liquidity
situation, the upper end of the corridor would now be lower at 25 basis points above the
policy rate. Shayan Ghosh
Financial Express: What do you think are the implications of
the farm loan waiver schemes and is it a cause of concern for the RBI?
Dr. Urjit R. Patel: There are several conceptual issues, if one were to put one’s hat as
an economist on. I think it undermines an honest credit culture, it impacts credit discipline,
it blunts incentives for future borrowers to repay, in other words, waivers engender
moral hazard. It also entails at the end of the day transfer from tax payers to borrowers.
If on account of this, overall Government borrowing goes up, yields on Government bonds
also are impacted. Thereafter it can also lead to the crowding out of private borrowers
as higher government borrowing can lead to an increase in cost of borrowing for others.
I think we need to create a consensus such that loan waiver promises are eschewed, otherwise
sub-sovereign fiscal challenges in this context could eventually affect the national balance
sheet. Thank you. Govardhan
Economic Times: Governor, you mentioned that forbearance is
no more tenable and that MPC is looking for resolving the bad loans issue. What are the
specific things that the RBI proposes to do to clean up the banking system, the bad loans?
Dr. Urjit R. Patel: I think there are a variety of things that have been put into place and
more will be put into place, going forward. As Mr. Mundra mentioned and as has been enunciated
in Part B of the Policy that a revised PCA framework will now be put in public domain
mid-April which will trigger actions by the RBI vis-à-vis specific banks going forward.
The IBC is now in place, the RBI’s Enforcement Department has started its work and the fact
of the matter is that there seems to be a renewed commitment from all sides, including
the Government that we now need to address this in even a more forceful manner than we
have in the past. Mr. Mundra, do you want to add anything?
S.S. Mundra: I think I did mention in my opening statement, one thing is very clear, a number
of instruments which were already introduced, if there is a need, there could be relook
even at the existing instruments but the message which we are trying to give is that all these
instruments are meant for resolution in a serious sense and not for postponement of
a problem. And I think that would be the basic focus, going forward.
Ira Dugal Bloomberg Quint:
Just on the inflation target side, your statement says we try and move towards 4% in a durable
and calibrated manner. This year we are saying 4.5% in first half and 5% in the second half,
and in the Monetary Policy Report there are some staff projections for the following fiscal
we are saying we could come to around 4.6% by the fourth quarter of the following fiscal.
Should one understand then that the RBI is comfortable with staying above that 4% mark
for the next couple of years? I mean, there is no time guidance obviously but if the projections
are suggesting that we are maintaining a neutral stance should we read into it if we are okay
with this? Dr. M. D. Patra: So, as you rightly read into
the MPR and other places, what RBI is signaling is that the move to 4% is going to be challenging,
there are no lucky disinflationary forces in the horizon that were there in the past.
And therefore if it is in this context that they move the stance from accommodative to
neutral so that there is no one way bets on the way the RBI moves. So, the evolving outlook
will decide how the RBI will move, but it is cautioning you that inflation is elevated
relative to where we wanted to be. Pradeep Pandya:
CNBC Awaaz The Federal Reserve has taken this decision
of unwinding their balance sheet. Earlier when there were talks of removing QE, it had
impacted the rupee hugely. At this time how are you assessing this and in coming days
what preparation would you do for the same? Dr. Viral V. Acharya: There was a sudden shock
in 2013, this time they have been talking of this since last two to three years, so
we are all gradually prepared for it. And I think emerging markets, including us, we
are in much better shape overall. And I would actually stress that on many dimensions we
are macro-economically very stable- something that the Government has taken actions towards,
something that RBI has actually taken lot of steps forward. So, the ‘Fed’ has a
very large balance sheet and it does create significant capital movements in the global
economy. But we are vigilant and I think we are prepared to deal with them with various
tools we have available. Shishir Mehta
Vyapar: Some cooperative banks have complained that
whenever administrator is appointed to conduct the affairs they are not very open to the
shareholders and depositors. Do you have any take on that? I am talking about a specific
bank. N. S. Vishwanathan: See, it is not correct
to speak about a specific bank in this context. But, please understand, whenever administrator
is appointed by superseding the Board, it means that there are problems in the bank
and the administrator has a new set of responsibilities to discharge and obviously if the Board and
the shareholders were responsible enough, the need for an administrator in the first
place would not have arisen. It is not fair for the shareholders to complain against the
administrators in that sense. S. S. Mundra: I would like to just add here,
as the structure of cooperative banks stands today, the shareholders and depositors are
not the same thing, basically the shareholders are the borrowers in a cooperative bank. And
to some extent may be not quoting individual bank, but they might have reached to a present
situation because of some of those actions only. So I think if administrator is working
towards safeguarding the interest of the depositors, it may appear little bit difficult to the
others. Mayur Shetty
Times of India: Governor, the spread between the yields on
long-term bonds, 15-year bonds and home loans has narrowed considerably, probably less than
100 basis points. I just wanted to know whether you are comfortable with this kind of narrow
spread or you expect some kind of correction going forward?
Dr. Urjit R. Patel: I mean, I do not think that at this juncture we are particularly
concerned about the narrowing spread, it reflects a variety of factors, including a possibly
slightly late transmission, so that is why it becomes evident. It could also reflect
that the credit score and the credit culture in this particular sector continues to be
good. So, there are no reasons at the moment why we should be concerned about the spread
coming down, it is a fairly secured asset which, you know, there is a long history of
dealing with delinquencies in the sector. So, I think it broadly reflects market forces
and the fact that housing has become an activity where there is a fair bit of Government support
also which has made it affordable, going forward. Latha Venkatesh
CNBC TV 18: To continue with what Ira asked you Governor,
you are speaking about upside risks to inflation. So, should we assume that even this movement
to neutral cannot remain for long that if you have to get to 4% you will have to even
go beyond neutral and get too hawkish? Dr. Urjit R. Patel: The Committee has also
pointed out a couple of downside risks and we have also said that the economic content
of the incoming data will determine our future course. We are of course aware of the risks
on inflation and we have a medium-term target to achieve. So we will do that, but we feel
that at this juncture the shift from accommodative to neutral is adequate. Thank you.

Robin Kshlerin

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