RBI Governor though warms up to Jan Dhan scheme Says system flexible enough to deal with banks' exposure in coal sector
Call it obstinacy or fiscal prudence on his part, but RBI Governor Raghuram Rajan for the fourth time in a row, kept key interest rates unchanged at 8 per cent on Tuesday, while maintaining that the apex bank will not cut them unless inflation moderates to anticipated levels, thus disappointing borrowers and the industry in this festive season.
The short-term lending rate (repo) rate will therefore remain at 8 per cent, and the cash reserve requirement of banks at 4 per cent. The statutory liquidity ratio (SlR) has also been retained at 22 per cent.
The RBI maintained status quo at a time when headline inflation has softened from 5.7 per cent in March to 3.74 per cent (in August 2014), while owing to healthy rise in sectors like coal and power, the eight core industries grew by 5.8 per cent in August this year as against 4.7 per cent in the same month last year.
Rajan hoped that inflation will moderate to acceptable level of 6 per cent by January 2016 and maintained that the GDP growth in the current fiscal will be 5.5 per cent, same as projected earlier.
On a positive note though he gave a thumbs up to the Pradhan Mantri Jan Dhan scheme and on exposure to coal sector, said that the system was flexible enough to deal with its impact.
While the unchanged policy will not result in any relief to borrowers in the festive season, RBI relaxed the 'Know Your Customer' (KYC) norms by allowing self-certification of documents needed for opening bank accounts.
The central bank is also in the process of modifying the definition of "wilful defaulters" so as to bring the directors of defaulting companies within its ambit and announced setting up of a Central Fraud Registry to check frauds.
In the bi-monthly monetary policy review, Rajan said, "the future policy stance will be influenced by the RBI's projections of inflation relative to the medium term objective of 6 per cent by January 2016, while being contingent on incoming data."
Industry said however that RBI has missed an opportunity to cut interest rate at a time when the WPI inflation has fallen to a 5 year low of 3.74 per cent and oil prices have softened to USD 94 per barrel.
Explaining the rationale for status quo policy, Rajan said that although WPI inflation has ebbed to levels consistent with 8 per cent inflation by January 2015, "there are risks from food price shocks as the full effects of the monsoon's passage unfold, and from geo-political developments that could materialise rapidly".
On inflation, Rajan explained, "the balance of risks is still to the upside, though somewhat lower than in the last policy statement. This continues to warrant policy preparedness to contain pressures if the risks materialise."
He said the fall in crude prices and relative stability in the foreign exchange contains some of the upside risks to inflation.
"We are currently positioned to reach the 6 per cent (inflation target) by 2016...As of now we are reasonably set, our expectation is that we will reach that target. The (future) policy will be data-contingent," Rajan told reporters after the policy announcement.
On growth, Rajan said second and third quarter growth will be lower than the first quarter, but the fourth quarter looks more promising. The RBI projects GDP to grow by 6.3 per cent in 2015-16 fiscal.
It said the 5.7 per cent growth in the first quarter of the current fiscal surprised on the upside and stated that the same has slackened in the second quarter.
One of the major contributors for the decline in growth will be the monsoon deficiency, which also affects non- agricultural sectors through demand effects, RBI report said.
However, the growth will grow towards the end of the fiscal, it said, adding that an improvement in exports driven by positive sentiments in the global markets and an increase in the yield-chasing fund inflows into the country will be the primary contributors for this.
Softening his stance on the Pradhan Mantri Jan Dhan Yojana, Rajan said he is not worried about the quality of KYC for opening new accounts and welcomed the financial inclusion scheme.
"We welcome the Jan Dhan Yojana, it is part of RBI's plan to get universal access," he told a press conference called for announcing bi-monthly monetary policy. I am not as worried about the quality of KYC for small accounts. In fact, we have essentially allowed for KYC that can be upgraded over time and in fact we have been more liberal on KYC," Rajan added.
The RBI Governor had earlier cautioned the banks on the risks involved in just hunting for numbers, asking them not to compromise on core objectives of the programme.
He said that the apex bank wanted a proper inclusion of unbanked households into the banking system.
Regarding exposure of banks' towards the coal sector, Rajan said there is already "fair amount of flexibility" in the system to deal with loans impacted by the Supreme Court order to de-allocate 214 coal blocks.
"I will reiterate that whenever we have issues of flexibility coming up, the real issue is putting the asset back on track, recovering the loan, etc. It's not about postponing recognition of the problem and let's keep that in mind," he reasoned.
He was replying to a specific question on bankers saying that they may ask for some flexibility from RBI in showing some "regulatory forbearance" in the face of the Supreme Court order last week.
"I think there is fair amount of flexibility already built into our approach and I think it would be premature to judge questions of flexibility," Rajan said.
Meanwhile, led by healthy growth in coal, cement and electricity sectors, the eight core industries grew by 5.8 per cent in August this year against 4.7 per cent in the same month last year. The sectors of coal, cement and electricity grew by 13.4 per cent, 10.3 per cent and 12.6 per cent, respectively, in the month under review, according to the data released by the Commerce and Industry Ministry.
Steel production expanded by 9.1 per cent in August this year as against 8.1 per cent in August 2013.
However, production of crude oil and natural gas declined by 4.9 per cent and 8.3 per cent respectively. Refinery products and fertiliser sectors too recorded negative growth of 4.3 per cent and 4.3 per cent respectively.
During April-August, the eight sectors grew by 4.4 per cent, against 4.2 per cent in the year-ago period.
The August figures would have positive impact on overall industrial production as the eight core sectors has a combined weight of about 38 per cent in the Index of Industrial Production (IIP).