Calls for greater autonomy for PSBs and an early freeing of diesel prices
Setting aside any speculation over reduction in interest rates in the coming days, Reserve Bank Governor Raghuram Rajan has stated that it is not just food prices that are persistently high but even those of other items which remain elevated across the board and that these have to come down to enable him to reduce key rates.
"Inflation is high not only in food, but also in non-food items and the best solution for the country is to bring it down. Then I can cut interest rates," Rajan told bankers at a summit organised by industry body Ficci. "I have no desire to keep interest rates high for even a second longer. I want to bring down interest rates when it is feasible and that would be when we have won the fight against inflation," he said.
"There is no point in cutting interest rates to see inflation pick-up again," Rajan said, adding that right now he thinks the central bank is continuing the way it proposed recently. Taking a dig at the industry for its persistent demand to cut lending rates even when there is a price increase in the sector, the Governor asked them to bring down prices.
"When you do that then we will do that, we have no problem. Clearly you will have no consensus on this," he said. The August wholesale price inflation sharply declined to a near five-year low of 3.74 per cent on declining prices of vegetables and other food articles from 5.19 per cent in July and 6.99 per cent in August 2013.
However, the consumer price inflation which the RBI has adopted as a monetary policy gauge, still remains high. For August, it inched down marginally to 7.8 per cent from 7.96 per cent a month earlier. The RBI is targeting retail inflation of eight per cent by January next year and six per cent by January 2016.
On growth, Rajan said that the dip in IIP showed that the was recovery is still uneven as the latest weak IIP data only underlines the fact that the economy needs a pick up in investment growth and that the recovery is still uneven.
"Friday's data suggest that the recovery is still uneven, but it is in my view this is a recovery from the fairly low levels of growth we had reached. But capital goods production came down once again, durables good production has not picked up. However good auto sales suggest that perhaps that may augur good consumption numbers going forward.
"The monsoon is better than initially thought, exports growth has picked up. But what remains is the investment growth to pick up. Credit numbers haven't picked up as strongly, but part of the reason might be that corporations are using financial markets - the bond and external commercial borrowing markets."
However, he expressed hope that a stable Government at the Centre will enable the economy stand out when compared to other emerging market peers. Speaking in the freeing of diesel prices at the earliest, Rajan said that the government must take advantage of the lowest oil prices in a year to deregulate diesel.
"lower crude oil prices are helping consuming countries like us. Typically a lower oil price means a lower CAD, lower oil subsidies and lower inflation. We need to seize this moment to eliminate diesel subsidies completely. We should take this moment to eliminate diesel subsidies as soon as possible," he said. The next revision in diesel prices is due this month-end and going by the present trend the under-recovery or the difference between the imported cost and the retailing selling price, will be wiped out with a minimal hike.
Even after the under-recovery is wiped out, the Cabinet has to approve de-regulation or freeing of diesel prices. This will empower the oil companies to change rates in tandem with cost like they do in case of petrol since June 2012. "We can of course wait but the moment will leave us and we may be back to subsidising," he said.
Rajan admitted that there are significant geopolitical risks with Ukraine and the Middle East in turmoil leading analysts to worry that the current low oil prices may be a temporary phenomenon.
Batting for greater autonomy to State-run lenders, Rajan said that the government should look at them as truly 'independent entities' that take their own commercial decisions and not as an extended arm of the administration. He also said that while it was fine for the government to involve banks to further the social sector agenda, it should ensure that such schemes should be financially feasible for the lenders.
"You cannot get a mandate and cannot fund it. After all, public sector banks also have private shareholders and are not any longer an extension of the government. They should be seen as independent entities," Rajan said.
"By all means, the public sector banks are there to undertake social actions when necessary but those mandates should be backed by financial gains," he said. RBI is working with the government on issues regarding the governance at central banks, Rajan said, adding: "We are in constant dialogue with the Government, we are discussing these issues on governance improvement, etc and let us see how much progress the government and the RBI make".
He further said that RBI has forwarded the recommendations of the PJ Nayak committee on corporate governance to the government for necessary action. The panel called for radical changes in the functioning of banks, including those within the top management and running of boards.
Some of its major suggestion are splitting the position of chairman and managing directors of the PSBs, giving longer fixed terms to the top management, paying them market prices as remunerations and having a transparent, merit-based system of appointments on the boards.
"We have to change the appointment process and expand the talent pool for management and boards of public sector banks, it has to be much more transparent and driven by people with strong capabilities. We have to strengthen board oversight and powers, boards have to be empowered and made more accountable," Rajan said.
"We have to change the appointment process and expand the talent pool for management and boards of public sector banks. It has to be much more transparent and driven by people with strong capabilities. We have to strengthen board oversight and powers, boards have to be empowered and made more accountable," he said.