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The Rediff Business Interview/ A V Rajwade

'For the first time, the credit policy will be different'

There seems to be a consensus on one thing about the Bimal Jalan-led Reserve Bank of India's second monetary policy: that it will be nothing more than a review of the first half punctuated with pointers to and projections for the second half.

Agrees A V Rajwade, banking expert at Forex and Treasury Management Consultants in Bombay, "The RBI governor will only take stock of the situation rather than coming up with major policy initiatives," he said in an interview to Syed Firdaus Ashraf.

What are the general expectations about the October 30 credit policy?

The RBI governor has already announced that there will be not many changes. The cash reserve ratio -- I don't think the governor will reduce it. At least not now. Maybe later, that too only if the need arises.

Jalan would look at two sides: money supply and bank deposit rates.

On the money supply side, inflation on both the consumer price index and wholesale price index is not very comfortable. But this is not a cause for worry. Bad crops is the reason; the situation will improve once the new crops come into the market.

Changes in the repo rate are likely; it may be cut.

(Repo: repurchase agreements or ready forward deals, a secured short term -- usually 15-day -- loan by one bank to another against government securities. Legally, the borrower sells the securities to the lending bank for cash, with the stipulation that at the end of the borrowing term it will buy back the securities at a slightly higher price, the difference in price representing the interest.)

How different do you think will this credit policy be from the earlier ones?

For the first time, the credit policy will be different. It is likely to focus more on macro economic review rather than specific measures or steps. I think one should draw conclusions only after seeing that what the central bank has to say. I believe that there is a need to review the macro economic scene.

The inflow of nearly $ 4 billion from the Resurgent India Bonds has led to a sharp increase in money supply which is now growing at over 19 per cent -- well above the RBI target of 15 to 15.5 per cent. Do you think the RBI will try to check the money supply?

I don't think the inflation is curable by doing something to money supply. The rise in inflation has come through the prices on agri products. With the arrival of new crops, the prices will fall.

The correlation between inflation and money supply in India is not very strong at all. If you sit with numbers and apply arithmetic, you will find the correlation is very loose.

It is believed that some banks will come to the aid of the Unit Trust of India.

I wonder whether the banks have been asked to do so. Will the banks fund the UTI if asked to? I doubt. The UTI authorities have been saying that they are not in trouble.

Do you think we will be able to target the GDP growth rate of six per cent?

The stock markets and the industrial activity are not at all picking up. The primary market is dead. For the last two years, I do not recall any of the good companies coming out with new issues. So, to achieve the target, I think we have to rely on exports because the internal demand is not too much. Given the current circumstances, I think we will have to live with five per cent GDP growth.

The cash-rich banks seem disinclined to fund the corporate sector. There is a view that this is slowing the growth rate.

Frankly, I think that the primary market is dead. Except few banks no good companies are entering the primary market. The manufacturing industries have not come out with a good issue for a long time. Therefore any new venture with equity purely from bank funds is not possible. So, it is very difficult for banks to lend money unless people show an interest in investing with companies.

Do you think a sudden cut in the interest rate is possible?

No, I don't think that the government will bring down the interest rate at this juncture.

The same government, it appears, is effecting frequent shifts in policies, forcing the industrialists to wait and watch.

Yes, it is true. Every 15 days new decisions come out. People feel that something new will come out after every fortnight.

Has the time come to do away with a biannual credit policy and go in for much shorter-term measures?

Yes, that is what the governor is doing. He is going to review the credit policy from time to time rather that giving a six month policy statement. Changes will take place whenever there is a need.

Had you been the governor what would have you done?

(Laughs) I would have gone on a holiday. Apart from the drop in the repo rate, one would like the central bank to look at relaxing some of the exchange control measures in the context of the mobility of the exchange rates. At present, it looks like that the rupee has stabilised in the exchange rate and is getting stronger.

Interviews