Unedited Transcript of Reserve Bank of India Post Policy Conference Call for the Media

Participants from Reserve Bank of India:
Dr. D. Subbarao – Governor
Dr. K.C. Chakrabarty – Deputy Governor
Shri H.R. Khan – Deputy Governor
Shri Anand Sinha – Deputy Governor
Dr. Urjit Patel – Deputy Governor

Moderator:
Ms. Alpana Killawala – Chief General Manager, Department of Communication

Moderator:

Ladies and gentlemen, good day and welcome to the Reserve Bank of India Post Policy Conference Call for the Media. As a reminder, for the duration of the conference, all participants’ lines will be in the listen-only mode and there will be an opportunity for you ask questions at the end of today’s presentation. Should you need assistance during the conference call you may signal for an operator by pressing ‘*’ and then ‘0’ on your touchtone telephone. Please note this conference is being recorded. Participants connected to the audio conference bridge may press ‘*’ and ‘1’ to ask a question. Participants present in the room are requested to use the mike while asking questions. I would now like to hand the conference over to Ms. Alpana Killawala from RBI. Thank you and over to you Ma'am.

Alpana Killawala:

Thank you Lavina. I won’t really stand between you and the Governor. So, Governor.

Note:

Governor’s comments as reproduced below are edited. The Q&As are unedited and will be replaced with edited version.

Dr. D. Subbarao:

Thank you very much. Once again welcome to this post policy press conference. Those of you who are keeping count, as I know you all are, this is my twentieth. You have all seen the statement and read about it and analyzed it already, but just so that we warm up I want to give a synopsis of the statement this morning.

We kept all rates unchanged – repo rate, reverse repo rate, CRR; the MSF rate too stays at 10.25% with effect from 15th of July. The considerations behind today’s policy were two; the first was from the external sector, we wanted to be prepared for all external sector developments and to be able to respond to them. The second consideration was the balance between growth decelerating and risks to inflation remaining present.

I will come back to guidance shortly but first I will make a short comment on the global developments. Global growth has been uneven and slower than we thought it might be when we met in May. The IMF has since come out with their WEO and they have said that growth this year 2013 is going to be 3.1%, down from 3.3% earlier. So instead of a multi-speed recovery what we have is a multi-speed slowing across all segments of the global economy. At the G20 Meeting in Moscow, about 10 days ago, there was realization that global growth is slowing down, that the risks to downside growth have been contained but those risks still remain elevated.

As far as domestic economy is concerned, the silver lining is the monsoon. Both spatial and temporal distribution of rainfall so far has been very good, and rain fall has been above the long period average except for some pockets in East and the Northeast. However, other sectors of the economy, both industry and the services are a cause of concern. We expected that they would be sluggish when we came out to make statement but the performance so far has been somewhat inferior to that. So keeping all that in view, we revised the growth forecast downwards, growth projections downwards from 5.7% to 5.5% for the current fiscal year. On inflation, Wholesale Price Index inflation has come down below 5% but retail inflation remains high. WPI inflation has edged up in June, largely because of food, especially inflation in vegetables and cereals. Fuel price inflation has declined due to reduction in coal prices in March and easing of inflation in electricity because of the base effects. In the May policy we said that we will endeavour to keep inflation for the current year at 5.5%, in that range, although there will be some edging down in the first half and edging up in the second half and the performance of inflation so far has been along the trajectory. And the Reserve Bank will endeavour to maintain an environment for inflation at a level of about 5% by March 2014.

There are risks to inflation. By far the biggest risk is the depreciation of the currency because there will be pass-through from imports, there will be increased under-recoveries as a consequence of that, and there will be passing off from producers to consumers. In spite of low demands, the concern is that producers might pass on higher prices to consumers. I was quite disturbed to see the latest analysis of the Reserve Bank shows that the pass-through has increased- for every 10% depreciation, the inflation is 1.2% as against the number of 1.1% earlier.

The second risk factor is global oil prices, which has not softened as much as other commodity prices; I am talking about global prices. Although the IMF and World Bank have said that oil prices will remain soft this year, there is a concern that that projection may not come true largely because of political considerations and the situation in the Middle East.

The third risk factor is fiscal deficit. The Finance Minister has said repeatedly that he will remain committed to 4.8% as indicated in the budget, but because of GDP performance, tax revenue accruals, expenditure performance, that all estimates the risk for inflation.

We have indicated the risk factors to the macroeconomic situation. I will just list them very quickly. The first risk factor is the external situation arising from the sudden stop and reversal of capital flows as we have seen in India over the last 10 weeks starting May 22. One big uncertainty is, it is not clear if financial markets have fully factored in the full impact of the prospective tapering of QE or whether there will be at every time there is some announcement.

The second risk factor is the high current account deficit above the sustainable level of 2.5%. Most external sector vulnerability indicators have deteriorated indicating that the economy’s resilience to shocks is eroded. The current account deficit, the level at which it is reinforces the importance of a credible fiscal adjustment both in terms of quantum and quality of adjustment.

The third risk factor is the weak investment climate for a number of reasons that we have listed in the document.

And the fourth risk factor is supply constraints. India is very unique in the world in the sense that we are a supply constrained economy and the biggest supply constraints are food and infrastructure both of which are putting pressure on growth and on inflation and its very important that those supply constraints are addressed at the earliest.

I now want to anticipate some questions as per standard practice and answer them and it is not so much because it is a standard practice but more than ever before I feel obligated to respond to some questions even without your asking.

The first question is what is the rationale for our liquidity tightening measures over the last two weeks?

The current account deficit over the last three years has been above sustainable level. The rupee should have depreciated as a consequence of the high current account deficit. In other words depreciation is programmed into the rupee. That did not happen because we were able to finance the current account deficit and we were able to finance it because of extraordinary liquidity in the global system. Because of the large current account deficit and because of the way we financed it, we became vulnerable to the external outlook, we became vulnerable to global financial markets and we became vulnerable to the sudden stop and reversal of capital flows in the consequent destabilization of the exchange rate. The only unknown was when this might happen and in the event the vulnerability came sooner than everyone in the world expected. The rupee dropped from 57 to 61 in a matter of four weeks without any change in our fundamentals. There was 5.8% depreciation between May 22, the day of the first announcement effect and July 26th the last Friday. This rapid depreciation of the currency put us into a vicious spiral amplifying unidirectional movements and encouraging a herding instinct. On top of the rupee movement there was very comfortable liquidity in the system. On July 5 LAF went into a reverse repo mode briefly. The easy liquidity provided a fertile ground for speculation on the exchange rate which exacerbated vulnerability. And we were having a meeting with our technical advisory committee last week. One of the members said what is vulnerability? Vulnerability is if something goes wrong then suddenly a lot goes wrong very quickly. That’s what happened to our system. So we determined that this volatility in the exchange rate is hurtful to the economy for a number of reasons. First, there is hysteresis in exchange rate. If it overshoots it may not come back to the original levels, it stays there, so it is very important for us to see that the adjustment took place along in line with fundamentals.

Second, rapid depreciation of volatility in exchange rate would affect the balance sheets of banks, corporates and even households. And of course volatility hurts growth in a larger sense. Forex intervention is a standard tool for defending against volatility. As much as we resorted to that instrument we were also conscious that whatever we did should not fuel speculation or should not help speculators. The first line of defence against excessive exchange rate volatility is monetary policy instruments and that is what we did. Once again I want to say that we were not altering the fundamental path of the exchange rate. Our action was informed entirely by the need to curb volatility and disorderly movement. So that is the first question about why we did this.

The second question is about when and how we might roll them back. That we tried to answer in the guidance today and you have all commented on that. I want to annotate that guidance.

First very briefly, the one sentence we wrote in the guidance, I quote “The recent liquidity tightening measures by the Reserve Bank are aimed at checking undue volatility in the foreign exchange market and will be rolled back in a calibrated manner as stability is restored to the foreign exchange market, enabling monetary policy to revert to supporting growth with continuing vigil on inflation”. That is a mouthful but that is what it is. We did not use the word ‘temporary’ advisedly because temporary would mean different things for different people and you would pressure us to define what temporary was and we were not in a position to define what temporary was. So in the event we determined that it might create more confusion than throw light. So advisedly we did not use the word ‘temporary.’ The roll back of the measures will be state contingent and data dependent, and linked to decline in volatility and disorderly movements in the exchange rate. Some of the indicators we will look at will be the bid ask spread, the intra-day volatility in the exchange rate, volumes of forward contracts to evaluate importers assessment of stability in the exchange rate, and open interest positions in the currency futures market, the options pricing, the forward premia, a number of other indicators, I am just giving you a sampling of indicators to give you a flavour of the nature and dimension of the problem we have which is that we are going to look at a number of indicators that determine if volatility in the exchange rate has been contained.

We will also make an assessment of the global markets. It is not just indicator, of course our indicators in part reflect global markets but we will also look at the global markets and see how vulnerable they remain to further announcement effects or indeed some action following announcements.

There has been a lot of speculation in the market about whether Reserve Bank is targeting an exchange rate. Once again I want to say that, that speculation is completely misinformed. We are not defending any exchange rate target and not altering the movement the exchange rate according to fundamentals.

Just note that the rupee depreciated from 47.4 in 2009-10 to 54.45 in 2012-13 and we did not stand in the way of rupee finding that level as it depreciated except to manage volatility. So what the Reserve Bank wants is reduced volatility and orderly adjustment of the exchange rate to its market level.

Finally, I want to say that the Reserve Bank is sensitive to the short term costs of tight liquidity measures on economic activity. And we are as anxious as everyone else to roll this back but getting locked into a timeframe is both infeasible and inadvisable. Thank you very much.

Alpana Killawala:

As always, Latha.

Latha:

Sir, Lata Venkatesh from CNBC. After the policy was announced it was read as dovish because you have said that but for the exchange market volatility the falling inflation would have given you a chance for lowering, quite different from what you said earlier that you have little space for further monetary easing. Now because of that, it probably has had negative impact on the rupee that is now at 60.13, so it actually has weakened believing that your resolve to be too tight is not all that pronounced. Also, of course there has been concomitant fall in bond and stock prices. So has the market read you wrong, did you intend to sound dovish?

Dr .D. Subbarao:

We do not make a determination about whether we want to sound dovish or sound hawkish. Now in the last five years that I have been in the Reserve Bank we did not start with the determination first and then fill in the language. Actually the language comes from a lot of analysis and the stance the way the analyst read it becomes a by-product of all that. Second, you said Rs.60.13 or whatever is the current level, we are not targeting a level once again. So if the rupee is adjusting gradually that is the way it should be. But I want to say that we remain committed to curbing volatility in the exchange rate. As far as the broader monetary policy stance is concerned, correct, we said in the policy that there would have been reasonable argument for further easing because growth as moderated more than we though the prognosis going forward is not as uncomfortable as before as much as our risk factors. So that is the reason behind language there that there would have been a case for monetary policy easing but for the external sector concerns, in fact, I would have liked it to be have been read as the importance that the Reserve Bank is attaching to containing volatility in exchange.

Participant:

Now that the rupee has depreciated further should we expect that you could probably want (Inaudible) 19:45 steps?

Dr.D. Subbarao:

I cannot really commit to that and it is not so much depreciation per se, it is the volatility that we have been looking at. So the level is not what you should be looking at. If I say 60.13, we are intervening it means how it would impact the measures, it means that we are targeting an exchange rate which we are not. So we will be looking at the volatilities a two-way movement to the exchange rate and indeed the one-way movement as well.

Anirudh:

I just like to understand the first thing, there has been a lot of criticism of late ever since you took your actions on the 15th of July from bankers from market participants as well that you know (Inaudible) 20:32 So I just like to understand personally whether it did cross your mind that it would be in a kind of a (Inaudible) 20:40 or equivalent, was that an option? And secondly, if you could give us somewhat of a timeframe as to how long the RBI would be comfortable with banks kind of passing on the impact of these kind of (Inaudible) tightenings which they are facing at this point in time?

Dr.D. Subbarao:

Thank you, Anirudh. First of all, criticism is power for the cost, okay. We are a public policy institution, we make policies that affect economy and everybody is welcome and entitled to criticism and we learn from that as I have said that many times before. But your most substantic question, yes, certainly it did cross our mind about what other measures we could be taking and see all our policies, repo rate hike and OMOs and whatever. Advisedly, we did not touch the repo rate or CRR and we determine that tightening liquidity by the measures we adopted by adjusting LAF and raising the MSF rate and by some open market operations is the best prescription for containing rupee volatility. The idea was to make liquidity scarcer and more costly. So we determine that modulating access to LAF would be the most efficient way of controlling volatility. And we determine that if we do this it can be calibrated more flexibly or rather than just falling of CRR or the repo rate because there are other implications attached to those measures. As far as banks responding by raising their rates, yes, they will always that have correction that transmission will take place in a way that is not advisable, but we are also aware that there is some cushion for the banks when we reduced rates over the last one year, transmission has been less than commensurate with that and we have been saying that transmission is still in progress. So I believe there is cushion available to the banks and they can perform without raising lending rates.

Hira:

You said your first line of defense is monetary policy, this time around you had the buffer because liquidity with easy credit growth for loans where you could have tightened liquidity. Now do you feel that you have room on the traditional monetary policy instruments should the currency not stabilize and what is the second line of defense, are we talking about capital management measures, though they are on the anvil, can you just go part-B to it, you are saying you want structural measure given that you have (Inaudible) 23.45 time breather during the RBI……, what structural way, export/imports, these are the things that will adjust over 3 to 6-months, are you talking more about a sovereign bond or something that is some reserve, what you have in mind sir?

Dr.D. Subbarao:

Thank you very much. I cannot really speculate on what other measures we might take should this problem persist. All of us including you hope that this problem will be contained and the measures we have taken now are adequate for that purpose. But should this problem take a different turn we will have to diagnose that depending on the circumstances, it will be both inadvisable and difficult for me to really say what measures we will take but I want you to be assured that there is enough argument with the Reserve Bank to contain volatility in exchange rate. On the second question about structural measures, we were talking about structural measures to contain the current account deficit not so much measures to finance the current account deficit. Of course that is an issue on which both the government and the Reserve Bank are in consultation we are engaged in a discussion, but then we talk about structural measures, policy document, the structural measures contained current account deficit. You are right that these measures cannot be taken overnight or even if measures are taken, they will take a long time and that they will also depend on the external situation. But I believe that signaling that the government is taking measures to encourage exports, the goods exports, uncontained imports by some domestic policies I think will be a very important signal to contain the volatility in exchange rate because what we have done is actually we find some space or a more durable adjustment and that space must be constructively used.

Participant:

Just a follow up governor, does the Central Bank have a formal view on the timing or the possibility of a sovereign bond? There has been so much speculation in the licensing over the central bank has a view of assigning the feasibility, and indeed whether you like a sovereign bond?

Dr.D. Subbarao:

I will actually collapse the question into does the Reserve Bank support or is in the Reserve Bank’s view is sovereign bond issue we have reservations about that. We have done a cost benefit analysis of the sovereign bond issue, there are perceived benefits of bond issue which will start buffer your research, it will lower your interest rates, it will establish a benchmark for government borrowing and broaden the investor base, those are standard text book arguments in favor of a sovereign bond issue but there are costs. It will compromise our financial stability. There is a lot of value to be attached to government’s borrowing in domestic markets. We have learnt that lesson during the global financial crisis, we are learning that lesson now. Those of you who have seen the mixed economies, we just talked about the trade deceleration in emerging economies. One thing is that they have said that the emerging economies are not as unsafe as they would have been because their borrowing has been domestic. They said that in a different context but we should interpret that in the correct sense to draw quite correct lessons. And when we really get a lower interest rate the cost of sovereign bond issue is not there if people factor in the exchange between issues. So in the Reserve Bank’s view the cost of a sovereign bond issue especially in the current juncture of benefits. We should be doing a sovereign bond issue if at all from a position of strength when we are much less vulnerable than at this time.

Vadika:

Governor this is Vadika from DNA. You said in the policy that these recent measures have been rupee-positive. Firstly, what kind of factors led to some conclusion, what data did you really look at? And secondly, in the past, we saw a lot of bond auction being cancelled, the treasury bills was one of them, the OMOs volunteer did not yield good results and currently the weekly government borrowing was also impacted, in fact there was devolvement on timely….. And the next week RBI came and the T-Bill auctions that went on but you borrowed at 11%. So what kind of signals that are you trying to register in the market?

Dr.D. Subbarao:

On the first question, we have said volatility has been reduced, the cost issue just look at the volatility on a day to day basis has reduced, there has been so me two-way movement, rupee went above better than 58 for a short while, so that was some early indication but I would then refer to Urjit to give you more considered answer on that. On the second question about our management of the roll over policy, the first policy was on the evening of July 15th, the second was on the evening of July 22, how did we manage that. The intent of the policy was to raise the cost of money at the short end of the yield curve. We were conscious that we were doing it abruptly. We were conscious that we were doing it in the middle of an important fortnight. So, first we wanted to leverage on the announcement impact. Just the Reserve Bank has resort through monetary policy measures to contain volatility has had a tremendous announcement effect. Quite independent of how we manage the roll up. Then there was a T-bill auction on July 17, and OMO sales on July 18, G-Sec auction on July 19. We determined that the adjustment to tight rates at the short end should be non-disruptful. We found that the T-bill bid were discontinuous with the market rates and some of the bids were higher than the CD and CPs of that. So, we determined that our adjustment would be too discrete, too discontinuous. As much as wanted the adjustment, we wanted a smooth continuous adjustment. It is true that banks had drawn Rs 200,000 on July 16, when there was a one day window to adjust for CRR over the fortnight, but remember they had given it back to us the next day, so that accommodation was for one day. We also found that not this week, not last week, but week before last week, I am talking about 17, 18, 19, there was some sort of uninformed reports of panic reaction in the market, so we wanted to calm the markets as much as we wanted the yield curve to move, we wanted that to move in a nondisrupt way and I believe our attempt was to navigate that nondisruptive movement, whether we have succeeded or not is for you to have a thought. Urjit.

Dr. Urjit Patel:

The effectiveness of the measures that we undertook this month in two or three phases was more in the way of a process rather than events, and we believe that we have achieved some success. For one the unidirectional fall in the exchange rate has been checked, especially if you look at the data post 9th July. The intraday volatility which is the range between the high and low during the day has declined from about 90 paise on July 9th to an average of about 48 paise post July 16th. The cancellation of forward purchase contracts increased from a daily average of about $0.5 billion in the first half of July to a daily average of about $800 million since July 16th which would imply that importers cancel forward, buying on perception of exchange rate stabilizing in the near future. And the volumes in open interest position in the currency future markets have also declined. And it is interesting that even both the domestic and offshore NDF markets have converged in terms of one month forward premia. So I think that is a fair bit of evidence in this regard. Of course the other things happening in the world at the same time and it is almost impossible to bifurcate and decode those other events but I think this is a fair bit of hard data there. Thank you.

Govardan:

This is Govardan from Economic Times. You had said that you would be standing in the way of rupee depreciation, at the same time as a temporary measure you did not touch the repo rate, does it indicate that the RBI is more for exchange rate to settle the macroeconomic imbalances than the interest rates?

Dr.D. Subbarao:

No, I do not think that conclusion or inference would be appropriate. We would use all economic variables for the interest rate and exchange rate for macroeconomic stability, economic growth, and inflation management, and external sector management. Yesterday, one of our advisors was telling me that you cannot treat them independently, they are interlinked, indeed he wrote me a long note, which I have not observed fully but the substance of that is that you cannot delink the exchange rate from the interest rate, they both linked. Also I want to say that we have to find structures and solutions to current account deficit problem, meanwhile we have to find financing for the current account deficit as much as it exists. There are sovereign bond issues, one option which you asked me, but there are other ways of financing the current account deficit. So Reserve Bank is interested in long term stable flows financing the current account deficit.

Participant:

You mentioned about current account deficit being the problem for the rupee deprecation, at the same time with this kind of hint about the short term measures, which could be temporary, of course, you did not use the word, calibrated, so either the assumption is that current account deficit is going to get corrected soon or these measures are going to remain for a longer time, so which was that?

Dr.D. Subbarao:

I do not want to commit to an answer to that. We hope and expect that the current account deficit will adjust, but whether current account deficit will adjust first or we will find financial and we will roll back these measures first it is difficult to say.

Bijoy:

Bijoy from Cogensys here. Earlier the domestic corridor reverse repo would actually was 100 bps, and MSS and bank rate would be undersized, but now that you all have once touched the corridor is it likely that now people can start and you can use the measure again in the future?

Dr.D. Subbarao:

Okay, thank you. On the first question, ‘temporary breather,’ that temporary was used like a 10th class student would use as an adjective to qualify the breather, and I do not think you should read from that any inference about whether these measures are short term, long term, whether they will be with us for months, weeks or days, etc, I do not think that would be the right direction to go. These are temporary exactly as you would read if you were not an economic analyst. Second, about the corridor, yes, the corridor has widened to 400 points, one of the first lessons I learnt in the Reserve Bank was the width of the corridor signifies level of certainty, right. So we have reduced the corridor and sometime during my governorship we had also said that we will honor a fifth corridor of 100 basis points or 200 between the MSF and the reverse repo rate. Now that we have moved it, it certainly signifies that uncertainty has increased. Whether we will make the corridor very revariable is uncertain, but we will be loathed to do that. We want to respect the width of the corridor as much as possible.

Ritesh:

Ritesh from Zee Business. Governor, over the last few policies you had most of the policies in that inflation dominated the policy decision, one or two policies you were coming toward the growth now it has moved towards currency. So what will prompt RBI or give RBI the signal that now is the time to take steps because on the other hand you have also revised the growth projections and it is not likely to improve anytime soon as all other agencies also revised? Secondly, you had said that the monsoon, in your initially remark you had said monsoon is silver line, but at the same time in your policy document you also said that better than expected monsoon has not yielded results on the food inflation front. So why do you think the bank rate is the problem and it is not yielding results in the food inflation front?

Dr.D. Subbarao:

Thank you for those questions, in fact I was looking forward to that question about growth, inflation and external stability. Reserve Bank is committed to all those three objectives. Growth, price stability and financial stability, which in our context today is external stability. The challenge for us, every time we make policy is to balance between those three objectives. We are very anxious that monetary policy must revert to supporting growth, that is why we have used a phrase enabling “monetary policy stance to reverting” We want to do that as much as anyone else, and we are hoping that certainly the situation will revert to normal so that Reserve Bank can support growth. Now that Wholesale Price Index inflation has tapped and there is growth has moderated there is a reasonable case, in fact, there is quite a strong case for monetary policy to support growth. It is not just now, all along the Reserve Bank maintains a strong commitment to support the growth, but within environment of price stability and financial stability to cause it was necessary conditions for steady and accelerated growth. On the second question about monsoon being a silver lining and still food inflation being higher, we would expect that since the monsoon is good, robust and in anticipation of a bumper crop, prices would soften. I understand from our panelist that prices have not softened as much as they should have, because of some distribution problems, weather-related distribution problems, in vegetables and all these. So, if we should take care of this, I expect that even the retail inflation can come down. In other words, at least a part of our inflation problem is not a problem of production, but a problem of distribution. I used to live in Africa, and in Africa one of the big problems is not production, it is the distribution that causes all the distress, we are experiencing part of that.

Participant:

Do you believe food security bill can cause a problem that because a lot of these production will go to the government companies or government agencies?

Dr.D. Subbarao:

Food security bill implications, the quantitative implications, the Food Security Bill are still being analyzed. In the Reserve Bank we have to analyze ourselves, we depend on a lot of studies that are coming at the outset. Studies so far show that there may not be a significant increase in the amount of food to be procured even after the Food Security Bill if the coverage of 67% of the population and the quantity is a 5 kg per person per month or whatever the parameters that are there. However, should those calculations be taken, certainly there will be pressure on procurement, there will be pressure on subsidy, there will be pressure on fiscal deficit that will have implications for growth and for inflation. There will be implications for the surpluses coming. The beneficiaries of food security might have, how much they might spend that, and what implications that will have for inflation. So there is going to be lots of economic consequences of the Food Security Bill which in the Reserve Bank would study further, but after that somewhat incoherent reply let me turn to either Urjit or Deepak or anyone who has got to add anything to that.

Management:44:23

I think it is correct to say that at the moment the fiscal consequences and therefore the macroeconomic backdrop that will change on account of the Food Security Bill is a bit premature to discuss because the numbers are still being worked out in terms of the marginal change that this will require in the system and therefore in terms of higher expenditure. And at the moment we do not have anything more to add other than what the government has said regarding the increase in cost this year or part of the year.

Pradeep Pandya:

Pradeep Pandya from CNBC Awaaz, yesterday’s macroeconomic report and today’s policy statement, you have many times referred to Fed, quantitative easing you have referred to, that is unprecedented in all the policies for the last several years that I remember. The question I want to ask you, these temporary or not so temporary measures, how long will it last. The answer to that actually is Fed or Ben Bernanke come, have you ever witnessed such a scenario, from September, QE’s rollback will commence, what measures will you take, if this goes on till December, or even further, will your job become easier?

Dr.D. Subbarao:

Urjit says, that he will answer that, right. I just wanted to tell you a story. In one of the BASEL meetings, one of the emerging economy governors asked Chairman Bernanke, that “Look, when we made our policy, we write global economy, what will Americans Fed going to do, what is the ECB going to do, what is the Bank of Japan going to do. And we analyze a lot of what you are doing, you will do, you said you will say, and you look at a document and there is a lot about that. When you make your policy do you ever think of us? So, this is true, that developments over the last 10 days has made have been a consequence of the announcement effect of the US Fed. Because of the Fed we are talking about, maybe in 3 months from now, 6 months from now, we will be talking about the ECB, or the Bank of England, or the Bank of Japan. The important thing is that systemically important countries do have an impact on the emerging economies like India as much as we are integrating into the world. And one of the challenges for us is to be able to better understand global trends and to be able to adjust to them better.

Pradeep Pandya:

But for that statement, you think things would have been completely different, I mean, they would have been talking in a very different context.

Dr.D. Subbarao:

Yes, we have said that in our document, but for that statement, that is a hypothetical question, it is another world, yes, it would have been differently certainly.

Dr. Urjit Patel:

I think the important variable entities and uncertain variables is that how much of the repricing in the international bond prices has already happened and how much is left. There has been a significant firming up of yields in the US, 60, 70 basis points, that is large. So many people, though not all, say that a fair bit of this has already been internalized by the market given the May and June guidance that was given by Chairman Bernanke; however, there is likely to be some residual effect whenever the actual taper start and eventually shuts down. It is important to remember that everyone knows what the quantity involved is, and you now have a fair indication on the month that it may start, of course it is a contingent guidance and you have some guidance on when it will end, so fair bit of this information is already there within the market and I would suspect that much of the bond pricing changes that were required may have happened, but I could be wrong, there are some who say this is the case, some who say it is not the case.

Pradeep Pandya:

One week, probably there will not be further selling in Indian bond market, if you think a lot of repricing has already happened in US?

Dr. Urjit Patel:

We would have to see what happens going forward. As you know there is a news flow every month from the US which is part of the contingent information that would determine this.

Saraswati:

There is a talk in our quarters in Delhi circle that India might be in a situation to approach IMF for a loan. Do you think the BOP situation is going to that extent that the situation might actually arise?

Dr.D. Subbarao:

The answer is no. I do not believe that we are in a situation where we have to go to the IMF, we are fairly resilient.

Participant:

Just, whatever I understand the bankers telling that they have made some suggestions in terms of dollar refinance window, is the RBI willing to consider those measures?

Dr.D. Subbarao:

The bankers have made several requests with several suggestions including resuming the dollar refinanced window. We will examine that but there is no commitment as of now about whether we might reopen that.

Anup:

Governor, Anup here. The market is talking about and a lot of analysts are saying that whatever measures you took in the last two, three months, people are saying that Reserve Bank is acting in a panic reaction. So, just one simple question, was that a panic reaction or was that well thought of plan?

Dr.D. Subbarao:

I would request you to please find an answer to that question. It will be difficult for me to answer it.

Mayur:

The fact that you have reduced liquidity curb speculation, but at the same time there is an impression given that these measures will be only temporary and that there will not be any transmission, thereby implying that these measures are temporary.

Participant:

Can I supplement Sir, my question was similar that is why. The charge against the Reserve Bank over the last two weeks has been that it is vacillating too much. To announce something on July 15th and then to reject so many auctions gives the impression that you are not serious and that it is also scared of repercussion. You announced again on 23rd and it looks like you are very serious and then the note of dovishment comes into current statement, whether you intended or not to dovish. The charge is that the Reserve Bank is not going all out to protect the rupee with the tightening steps, in the process it will only have to do this tightening for longer and harder.

Dr.D. Subbarao:

I do not agree with those charges. As I said earlier, we have not used the word ‘temporary,’ very advisedly, because the Reserve Bank does not want to get locked into a timeframe on how long these measures might be necessary. We are determined to control volatility in the exchange rate. There will be consequences for this, there will be pain in the economy, somebody will have to pay a cost for this, and those costs are inevitable and unavoidable. But, we will persist with these measures and implement them consistently in order to achieve the intended results. In the two weeks between 15th16th July and 26th of July I explained that in response to an earlier question, in response to audience question that we wanted a nondisruptive adjustment to higher interest rates at the short end. And that has been happening and that is going to happen. Whether it will transmit to the long end is uncertain. As I said, it might well transmit, but our intention is to invert the yield curve such that short rates are higher, and the long rates stay where they are. That is good for the economy.

Participant:

The rupee today has moved again crossed 60, it is at 60.35 right now. This appears to be sort of in response to the policy which seems to indicate that rates will come down in future.

Dr.D. Subbarao:

Rates will come down in future, but not until such time as volatility in the exchange rate is contained.

Participant:

Rs.1.60-70 paise in three days, that is the kind of volatility we have seen. Is it something you are comfortable with or you will act to it?

Dr.D. Subbarao:

We are watching this, and we determine that if further measures are necessary, we will take that. It is difficult to say, when we will take them, and what measures they might be, but we are of course watching them.

Ruchira:

Hello Governor, this is Ruchira from The Economic Times. We were told by the bankers that they have asked you to consider a reduction in the average daily holding of CRR from 99% below, because they claim to say that all banks are holding in excess of 100% because failing to do that would lead to statutory failure so will you be considering that why or why not?

Dr.D. Subbarao:

Let me turn to an experienced banker, our Deputy Governor Dr. Chakrabarty to answer that.

Dr. Chakrabarty:

The idea of maintaining the CRR is this has to be maintained on daily basis. If we have allowed them to maintain 70%, it is a historical perspective, because when banks were not computerized information was not available. Now that information is available, banks should not have any difficulty maintaining the CRR on a daily basis. If they have a problem of outflow or inflow of the funds, they have to manage their clients. They cannot take over the job of the cash management of the clients on their own and in turn they pass on this big thing to Reserve Bank of India. That is our present thing. We feel that as of now 99% maintenance of the CRR gives enough opportunity to the banks to meet here and there deviations from the small customers, the big customers are not behaving properly, then the cost has to be passed on to those customers. That is the issue, but CRR is a discipline. What we have prescribed, this must be maintained on a daily basis.

Ruchira:

One follow-up question, you ruled out IMF, you have ruled out a sovereign bond issue. How do you think can this deficit of around $70 billion be bridged?

Dr.D. Subbarao:

The entire $70 billion dollars is not a deficit, there are other avenues of capital flows and there are a number of other options that we are talking about, you know the full menu. Even sovereign bonds issue, I said the Reserve Bank has the (Inaudible) 56.58 because you asked me about the Reserve Bank’s position, but we will be discussing with the government and all options on the table will be considered. Whatever we do should be in the best interest of long-term economic management, it should not be influenced just by short term requirement.

Participant:

Bankers mentioned even other things when they have requested, the crisis lasts for a longer period, they said that could HTM be brought back to 25% and could you give a one-time provision for transfer cost from AFS to HTM and that too (Inaudible) 57.45. Do you have anything to add on whether you are considering it?

Dr.D. Subbarao:

They have made a number of requests as I have told you, and I have in fact a more complete list obviously of all the requests that they have made. We will be studying them, examining them, but it is not clear that we will agree to all or some of them. But over the next one month, Anand Sinha told me that we will be studying that.

Participant:

Just had one last thing on the rupee if I can. The whole issue of speculation, what data does the RBI have to give a concrete evidence, there has been speculations that on the onshore market it is on the NDF market, how large was the speculation problem that you felt that you needed to actually, like from the NDF market, then how is the RBI going to tackle that?

Anand Sinha

Speculation can be existing, speculation can be potential. Where there is a (Inaudible) 58:40. There are pockets where (Inaudible) particularly corporates can speculate because everything they do not hedge. There is an opportunity, there is a view that (Inaudible) so there are pockets of speculation existing and potential.

Dr.D. Subbarao:

I want to add, speculation is a legitimate economic activity, and it adds value. This undue speculation that we are in is speculation triggered by very comfortable liquidity that has been damaging in the short term. That is what we are trying to curb. It is not the Reserve Bank is against speculation per se.

Participant:

But does the RBI monitor the NDF market as a part of the exchange rate monitoring and all, and considering that the RBI does not have a direct control on the NDF market, in the auctions, willing to dilute or any danger the impact of your measures eventually on….

Dr.D. Subbarao:

Not I, but there are lots of people in the Reserve Bank will monitor the NDF market and the existence of the NDF market has influenced our foreign exchange market, but has influenced much more in times of volatility statistic. It will be a better world for us if there is no NDF market, but we cannot wish it away.

Anand Sinha

Just add, one thing which we are trying to do is, currency futures markets there is a lot of position taking was taking place, we should have curtailed, and month end there is going to be further reduce hopefully, if not, further measures could be taken. So, there is connect between NDF market and futures market. If these markets go down, automatically the propensity to advertise between the two markets where there is no requirement of underlying pool up will go down.

Participant:

But the easier way is to allow the FIIs in this onshore to currency futures market, so they don’t have to go to the offshore market at all.

Anand Sinha

All people do not go to offshore only for hedging. Most people do go not for hedging purpose, but for…...

Gopika:

Governor this is Gopika from CNBC. With your permission may I shift your attention a little bit to a boardroom battle going on which is in one of the small private sector banks? Now this gains relevance because RBI set to give licenses to new private sector banks and any sort of boardroom battles of such kind can cause reputational risk and also sort of put pressure on even the banking system. So in this context are you looking into this particular case? I know it is a specific case but are you looking into such boardroom battle that is going on in Yes Bank?

Participant:

There is a supplementary question to that you are also considering to give licenses to new banks in all probability that could be that you will consider giving that to industrial houses as and when you do whatever the decision. Would you look at segregating or not giving promoters or promoters holding executive roles on bank boards like being the CEO or being the MD wherein there could be a conflict like it is there in the current scenario?

Anand Sinha:

As of now there is no prohibition on promoter’s taking executive jobs. As far as promoters are concern you are also aware that in a bank ultimately the holding is brought down to a very low level. Today it is 10% barring some exceptional cases and in the case of new banking license 15%. Now this board room battle which is going on we are studying it and if we think that some measure needs to be taken on the issue as you have mentioned we will look into that.

Participant:

In this context have you sought any information so far from the banks in terms of the progress of the case because it has gone to court and there have been many corporate governance issues have been raised in the affidavit that has been filed and the courtroom process that has gone so far.

Anand Sinha:

It is not necessary for us to call for information. In any case we get all the information.

Participant:

Sir the point being contested if the qualification of the director, would Reserve Bank be looking at kind of specifying what qualification a director should have to be appointed on a bank board.

Anand Sinha:

As far as BR Act is concerned it does specify certain qualification and then there are shareholder director so the norms are there what qualification you have in mind?

Gopika:

In this case specifically one of the directors who are appointed who are beyond that age limit.

Anand Sinha:

That is not correct. There is an age limit of 70 but it is not a very hard limit but it is generally observed. Now when he was appointed he was well short of 70. Some part of his term may go beyond 70 but it is not the same thing as being over 70 and he has been given approval for only 1 year.

Participant:

Follow up on what just Gopika asked. Like she just said that as far as the qualification is concerned what I really meant was educational qualification on the work experience and a bit like that because that is the main crux of the fight here because one of the reasons as to why she is not been qualified to be on the board is may be they are not very happy with the work experience or the years or work experience or qualification so is that…

Anand Sinha:

As I said as far as we are concerned the qualifications are laid down in the VR Act that is related to specialization. Here from what I can make out from the newspaper report is that the board seems to be feel that the candidate is not of the same level as other that is their perception we don’t come into play.

Virendra S Rawat:

This is Virendra Singh Rawat from Aaj Tak, two questions; one on Wal-Mart. At present investigating the case and I think they have requested RBI to send their clarification on this, notify FDI rules and all…

Dr.D. Subbarao:

Virendra, before you further, we do not discuss specific companies, specific issues.

Virendra S Rawat:

The second thing is that some days back Intelligence agencies have found some exporters or importers overpricing and underpricing and they are attaching dollars abroad. So just need RBI perspective because it has impact on dollar so.

Harun Rashid Khan:

There was a news item in one of the newspapers two days back on this. We have seen that. As of now we do not think it is a major issue, but we will further study it.

Alpana Killawala:

Thank you very much, thank you Laveena.

Moderator:

Thank you ma'am. Participants on behalf of RBI that concludes this conference. Thank you for joining us, you may now disconnect your lines. Thank you.