Budget 2020

We will be able to manage the bond yields: Shaktikanta Das

Going forward, digital methods are going to play a major role, but the banking sector will continue to remain relevant and banks have a major role to play, said RBI Governor Shaktikanta Das at the Times Network India Economic Conclave 2021 in a Q&A with Nikunj Dalmia. Edited excerpts:

While you have alluded to the big picture, as a journalist I am tempted to first start with the near-term challenges which unfortunately is the rise in COVID-19 cases. Does that challenge your economic forecast? We were hoping for a V-shape recovery, is it time to say the V could become U?

In the Reserve Bank, we have never given our projections of forecast of growth in terms of any alphabets. But having said that, you are aware that we have given a projection for next year’s growth rate of 10.5%. Our research teams are currently working on the incoming data on the high frequency indicators and as you know the next monetary policy committee will come up in the first week of April or so and we will give out our forecast on that.

I entirely agree that the renewed surge of COVID cases in many parts of the country is a matter of concern. But we also have to keep in mind that this time around, compared to where we were last year in March or April, we have some additional insurance cess against the impact of the pandemic.

Firstly, there are two vaccines which hare being rolled out and the speed of rollout is moving very fast. About 5 crore people have been vaccinated. The second aspect is that overall, people are by and large more used to the COVID protocol. It appeared that people had lowered their guard, but I am sure they will step up their guard against the spread of COVID pandemic. And third, at this point of time one does not foresee the kind of lockdown that we experienced last year, because last year it came as a huge shock. This time we know what the COVID-19 pandemic is all about, notwithstanding some new strains which have developed.

I feel that the economic activity and the revival of economic activity which has happened should continue unabated going forward. I should not be saying it before the details are presented before me by our research teams, but my understanding and our preliminary analysis show that the growth rate for next year of 10.5% which we had given would not require a downward revision.

Can I say that a downward revision for growth is not required, but also there is no need for an upward revision for inflation despite the fact that food prices and oil prices have gone up?
I can see the journalist in you. I will not bite that. I think you have to wait for the monetary policy committee to give out growth projections.

Allow me to bring your attention to what is happening to bond yields and it is a global phenomenon. Is there a question mark which has been raised on the central bank’s ability to keep the yields under check?
I would like to say that there is no fight. I mean, there is no fight between the central bank and the bond market at least. I am talking about India and I have said earlier also, the relationship between the central bank and the bond market players need not be combative and it has to be cooperative. What we are emphasizing time and again is that there should be an orderly evolution of yield curve and not sudden spikes or any knee-jerk reactions to certain incoming numbers.

Government borrowing remains almost in the same region as it was. For next year, the borrowing numbers are the same as it is for 2021, but I have explained on a number of occasions earlier that the Reserve Bank is very much there in the field and the RBI has given out the numbers. In fact, I have given the arithmetic of it also and I would just like to repeat for the benefit of your viewers and the audience. You see the central government borrowing; the net borrowing is 9 lakh crores and current year we have done open market purchase of government bonds of about 3 lakh crores. So next year, it is not going to be any less than that. If anything, it will be more than that. You have minimum 3 lakh crore coming from OMOs and we have also given special dispensation with regard to the hold to maturity dispensation, which brings in another 4 lakh crores. So, 7 lakh crore is already available and the gap is only 2 lakh crore.

We are confident that we will be able to manage the bond yields. All we would like to stress time and again is that an orderly evolution of the yield curve is very important for two reasons. Number one, a disorganised, disorderly yield curve evolution will act as an impediment for growth and will undermine the process of economic recovery, not just in India but in all countries. That is why all central banks are concerned with this issue. Second thing is why bond yields are important. Bond yields are important because they are the benchmark for the cost of money for the private sector. As you know the private sector borrowing from the markets are benchmarked on the government securities of let’s say three-year or five-year maturity, or sometimes ten-year maturity. Therefore, all that we are emphasising, which central banks across the globe are emphasising, is orderly evolution of the yield curve. You would recollect Jerry Powell, the Fed Chief, about two weeks ago also mentioned the orderly conditions of financial markets.

Let me bring your attention to the currency. India’s forex reserves are the fourth highest in the world. What is RBI’s definition of comfortable and surplus, because that will tell us what level RBI would say is necessary and what they would say is surplus?
It is a dynamic situation. There are two objectives in our forex intervention. One is to prevent excessive volatility of the exchange rate of the Indian rupee vis-à-vis the dollar. There should not be excessive volatility, that is the main theme of our intervention in the forex market. The second theme is that emerging market economies need to build up their own buffers. We have experienced and seen the adverse impact and the negative fallout of taper tantrum of 2013. We cannot afford that kind of situation again.

Now the expansionary monetary policy which the advanced economies are undertaking, at some stage they will unwind and they will reverse. At that time, the spill over impact is maximum on the emerging market economies. And emerging market economies have nowhere to go, but to look at their own buffers. Therefore, like many central banks, RBI is also building up our own buffers to meet with such situations. In fact, earlier this approach was frowned upon by free market economists and those who emphasised very much on the market. But if you see the recent framework which has been brought out by the international monetary fund, even IMF has recognised that forex intervention has become necessary for emerging market economies to deal with volatile and adverse situations.

For an adequate level, 20 years ago it was viewed that one year import cover is sufficient. But there are various parameters and yardsticks by which the adequacy of forex reserves is measured. Today, we have our import cover, our forex reserves they represent an import cover of about more than 18 months; that is more than one-and-a-half years. But internally, we have no such target of reaching a particular level of forex reserves. It all depends on many factors, like how the international situation develops. It is a very dynamic world and we will have to deal with the situation that unfolds.

Looking at the fact that the Indian economy is changing, PLI schemes are trying to move us towards global competitiveness, is RBI committed to keep the rupee competitive?
We will keep the rupee stable. It is our endeavour always to keep the exchange rate stable because certainty and stability are good for investors, are good for importers, are good for exporters, and in fact are good for all stakeholders in the economy. It is also good for thousands of Indian students who go abroad to pursue higher education. So, stability of the Indian rupee is the fundamental principle which we tend to and do follow at the RBI.

Has the government taken RBI’s opinion on which government banks should be privatised?
Now this is a matter which is constantly under discussion between the central government and the RBI. It is a subject which is constantly discussed. We had discussions definitely before the budget and more after the budget. The central government always takes into consideration the view point of the regulator and we are under discussion on this issue

Is there a difference of opinion on cryptocurrency? That is the sense we get if we look at what the RBI has stated publicly versus what you got from the finance ministry.
I do not think the finance ministry or RBI have given any different points of view. All that we have flagged to the government. I have reasons to believe that the government is in agreement. The central bank digital currency is one thing, while the cryptocurrencies which are being traded in the market are something else.

Both RBI and government are committed to financial stability. We have flagged certain concerns around these cryptocurrencies which are being traded in the market, and we have flagged certain major concerns. It is still under examination and the government will come out with a decision sooner than later. That is what it has articulated at various levels. I do not think there is any difference of opinion.

Bill Gates famously said banking is necessary, banks are not. Very dynamic changes are happening in Indian banks, how prepared is the RBI for the changes that will happen this decade?
In fact, this is precisely the background to which I devoted a considerable portion of my address to fintech and to digital appraisal of credit sanction, to digital appraisal, to digital methods of lending, etc. Going forward, the digital methods are going to play a major role, but the banking sector will continue to remain relevant and banks have a major role to play.

What I emphasise is that banks need to adapt to new technologies and adapt to the changes and transformations which are happening in the world of digital lending to remain in sync with the time. In India, I see a situation where the banks will continue to remain vigilant, but the method of operations and working for the banks to promote financial inclusion or to reach a wider segment of the credit market will be more technology dependent going forward.

In this pandemic crisis for you personally, what has been the most joyful moment and what has been the most painful moment?
The most painful moment has been that so many people have lost their lives and livelihoods. I am saying this in all seriousness. Many of us or our friends, we have lost our near and dear ones. That has been a very painful moment. When you suddenly hear that somebody you know is no more, it has been very painful from time to time to hear such news.

And the most joyful moment… Well, the central banks have to always keep their fingers crossed, the central bank governor has to keep his fingers crossed and be very watchful. We should not ever busk in happiness or joy that the innings is over and half century or a century has been scored, because every day is a new challenge.