For Reserve Bank of India governor Raghuram Rajan, it has been a year-long fight against inflation since he took charge in September 2013. He candidly said in a press conference post the credit policy announcement that manoeuvering interest rates is the only tool he has to counter the inflation demon. He also talks about other issues such as supply-side constraints, food policy and bad loans, among others. Edited excerpts:
On interest rates
I don't want to hold up rates. But that is the only tool I have. The supply-side constraints will have to be addressed, and in the meantime we need to keep the demand down so that the economy is not overheated. Interest rates are not the only thing that is holding up investment but that is one of the factors.
On food policy
India needs to have a relook at the food management policy that promises the farmer adequate compensation for the input cost, and at the same time the customer is not captive to local pricing. Though the price of grains and pulses are stable, the prices of perishable goods like fruits and vegetables vary from region to region. We need to build logistics and improve market infrastructure so that seasonal spikes in food prices can be checked. Many economists believe that higher minimum support prices (MSP) are leading to higher food prices, but MSP has an impact on the past inflation and not future inflation. But the government -- the UPA and the present government -- is keeping MSP at single digit. So it is not going to impact inflation significantly.
On rupee
The rupee is depreciating only against the dollar, but the dollar index has appreciated by 6%. RBI is only checking the undue volatility in the rupee. A lot of forces will help the rupee appreciate and RBI will not stand in the way of those forces. The stability in the rupee is causing many companies to be complacent to hedging their foreign currency exposures, which has risen significantly.
On bad loans and cancellation of coal blocks
The size of the stressed assets is large so it is no use postponing it to some other time. Ever-greening is happening all the time but the best way out is to tackle the underlying problem. Banks should not postpone the bad debt problem to tomorrow -- tomorrow may be worse. Reforms are needed in the coal sector and now that the legacy of the past is dealt with. The government may come out with a coal policy that benefit all the players. So it is hard to ascertain how many loans will go bad as a result of this. It is too early to say and the issue of offering a regulatory forbearance at this juncture is too early to anticipate. The joint lenders forum is tackling the bad problem.
On wilful defaulters
The RBI is in the process of redefining the definition of wilful defaulter so as to bring the directors of defaulting companies under its ambit. We are in the process of modifying the definition so that the directors, if seen, as culpable in actively participating or being grossly negligent of wilful default. We will see if there is any provision in the Companies Act.