Markets and bankers cheered the RBI’s second quarter monetary policy review alike on Tuesday as it was on expected lines. Soon after presenting the review, RBI governor Raghuram Rajan interacted with media-persons. Edited excerpts:
Were you surprised the way markets rose after the policy?
My job is to ensure that growth and inflation dynamics are appropriate for the economy. If the rise is not based on fundamentals, I am not happy because it would return to fundamentals at some point. Whether it is based on sentiments or fundamentals, I leave that to the public.
So it doesn’t matter if you do not surprise the markets?
Sometimes, surprises are good on some issues. But in general, I don’t think the intent is to confuse the markets; but I cannot lay out the actions that will be taken. I want them to understand my reaction function.
What should be the net impact of today’s policy action?
In the short run, cost of funds would come down, but that has been our point that we want to reduce the cost of funds from the level they were raised to, given the need for liquidity-tightening measures to stabilise the exchange rate. We want to bring it lower than that to a higher level that is consistent with inflationary conditions. So, higher than what was pre-May 2013, but lower than what it is now.
Do you expect banks to cut lending rates?
I expect them to take appropriate decisions. I think that the banking system is competitive, let’s see what they do. I don’t want to tell the banks what they ought to do.
Are you happy with the amount of dollar inflow under the RBI’s swap window?
The number has inched up to $12.1 billion since the window was introduced. What I am happy about is that if it wer e not for bank exposure limits, my sense is this could be far bigger.
Any concerns on the way banks are bringing this money? There is a lot of leveraging taking place...
It’s not a risk for us. It is the risk on the entity that is putting on the leverage — both the banks and the non-resident Indian who are getting higher rate of return. My sense is this is typically happening to high net-worth individuals. There is no significant risk there because we have a lot of faith in India. But for the outside investor, if I had to issue a bond, they would have to be convinced. The rate of return that we would have to pay would be quite significant. Think of this as an insurance, we are trying to purchase an insurance, maybe costly. But to the extent it helps us send a strong signal and stabilise the rupee, it is worth the cost.