RBI Governor Raghuram Rajan kept the key policy rate unchanged in his last policy meet — as expected, and brought down the curtains on what could said to be a stellar inning. Under him, inflation was curtailed, banks were told to reconise bad debt, and forex reserves were boosted.
CNBC-TV18 spoke to a wide spectrum of people from different walks of life to share their views on the outgoing governor. Jayesh Mehta Managing Director & Country Treasurer Bank of America said that Rajan’s thrust on liquidity has been consistent as he has re-emphasised it again and again.
Leo Puri Managing Director UTI Asset Management Co said Rajan has given India a push in the direction of digital revolution and financial inclusion. “He has embraced change and this is in keeping with central banks everywhere.”
Regarding NPAs, Puri said Rajan has managed to get the banks to recognise bad debt and more importantly he has built a consensus within the government system.
Rajan has done his part of the job more than one would have hoped for, said Sanjay Nayar CEO and Country Head KKR India. “He has given a message that inflation targeting is critical,” Nayar said, adding that Rajan is trying to create capacity for credit.
“He has addressed the fact that there is a need for financial inclusion at a low operating cost.”
Nilesh Shah Managing Director of Kotak Mahindra Asset Management, said the rock-solid performance of the rupee is a testament to Rajan’s efforts at managing the currency.
For NPA, the biggest issue is timely recognition. The RBI in the last few years have done a remarkable job in recognising NPAs and creating a mechanism for resolving it, Shah said. He also added that asset sale isn’t happening as expected, but that is a result of the environment.
TV Mohandas Pai Chairman of Manipal Global Education said Rajan has opened up India to inflows of money because for start-ups he has created an environment for them to stay in India.
DK Joshi , Chief Economist, CRISIL, said that the system is in place which will ensure inflation stays grounded.
TV Mohandas Pai, Chairman, Manipal Global Education
Q: What is your sense about Rajan\\’s contribution. We have discussed the macro but from your vantage digital point is this a big contribution to the financial sector that he has made?
Pai: Let me start by saying being an outsider to the system having worked in a very large financial system outside India and United States at the International Monetary Fund (IMF), being the Chief Economic Advisor he had a very different viewpoint when he came to the Reserve Bank of India (RBI). He bought an outside in view and bought in global best practices. He was not afraid to take decisions, he was interested in improving the system, opening up the banking system, taking away the nanny state image that RBI had in handling the banks, making the banks more responsible and much more accountable and he did a lot of things to open up and set in place the proper process. We are following the wholesale price index (WPI) instead of consumer price index (CPI) for inflation targeting whereas inflation impacts consumer. It is a conceptual error of the procedure, he corrected that.
As far as the digital world is concerned we have met him four times and he has opened up India to inflows of money because for start ups he created an environment where he made it better for them to stay in India rather than re-domicile. Many companies are re-domiciling the trend of re-domiciling stopped because he intervened, opened up the foreign exchange area and removed some of the hassles. He has done a fantastic work and left his imprint. He will be among the top 20 percentile, best governors India has ever had.
Q: Payment bank licenses we assume in a month or in a quarter will lay the last mile to the Jan Dhan accounts. One assumes that we will see a lot more people paying each other even migrants sending money home to their villages through either the UPI or through the payment bank. Is this something which is going to create a major thrust of financial inclusion and perhaps even analytics based lending?
Pai: Let me say that the India stack which was created by a bunch of volunteers led by Nandan and Sharad Sharma and others was something that Dr. Rajan bought in very well and allowed them to penetrate the system and make it happen in the last three years. It is a very important thing because no central bank governor on the world is open to innovation on a scale that Dr Rajan did. So allowing the India stack to come which has UPI, which has Aadhaar, e-KYC, digital locker and e-privacy is a full stack and has allowed 250 million people to come into the digital era along with the payment bank it means that the banking system, the payment part of the banking system is now open, many more start ups can come in on a layer of API, it will make transaction cost cheaper, it does bring in competition into the banking system and has opened the genie up to everybody else. From a close system he has made it an open system and I can say very confidently what Dr. Rajan has allowed to happen and the India stack is a signal for 6 billion people on this planet for a new era of banking. The existing banking model is geared towards the 1 billion people in the Organisation for Economic Co-operation and Development (OECD) countries. The new model that India has in digital banking is for the 6 billion people who are probably outside, are not very familiar with the banking system. So, it is for them. So, we are going to lead this revolution in the next three or four years without too much of legacy. Since more banks are in core banking and if you put a layer of APIs on top of them this digital banking becomes easy to do. So, it will be extremely competitive. It is a fantastic thing that has happened in this country and it will revolutionise banking.
Leo Puri Managing Director UTI Asset Management Co
Q: What did you make of Rajan\\’s legacy in terms of monetary policy? He has put in a monetary policy framework, bound the country by law to a 4 percent inflation plus or minus and a monetary policy committee. That is a seminal institutnalisation of inflation you think, it will last?
Puri: I think it will and I think it is a very progressive step that he has taken. There has been a lot of debate as to whether or not India needs such a regime. However he has presented a very cogent case. He has built consensus around it and it will be one of the many significant contributions that he would have made as a governor.
Q: Is this a seminal step at all in financial inclusion that we are seeing under our eyes?
Puri: Absolutely. He has been a extremely modern and progressive governor in this regard who has embraced change and this is in keeping with the best central banks in the world who actually recognised the potential of financial technology to drive inclusion, drive efficiency, drive transparency and so he has really given us a big push and a positive nudge in that direction.
Nilesh Shah, Managing Director, Kotak Mahindra Asset Management
Q: Is India respected now as a country of strong macros, does it look like this country now will not very easily renege on inflation, on current account deficit and on commitment to this discipline?
Shah: I think today market and investors are definitely expecting that on the fiscal path government is following the commitment which they have promised in last year’s budget and year before that. Next year also we should be targeting fiscal deficit around 3 percent level, so that’s a building up of very strong macro and from a market point of view the way today rupee volatility is there, whether in terms of implied volatility in options or in terms of actual volatility in terms of behaviour, it’s one of the lowest we have witnessed in many years and especially in a era where other emerging market currencies have fallen like a stone, the rock solid performance of rupee is clear testimony to RBI’s credibility and managing currency.
Q: Is even recognition of non-performing asset (NPA) something which not all central bankers have had the courage to do, was that itself a great thing and then the way he went about it, your take on this?
Shah: I completely agree with Sanjay. Clearly for NPA the biggest issue is timely recognition and if you could recognise NPAs timely, probably the burden of NPA wouldn’t be so high, so clearly RBI in last few years have done remarkable job in terms of recognising NPAs in terms of creating mechanism for resolving it and then working within the environment to bring that issue on to the top priority.
In terms of results, probably one will be little bit disappointed because still there might be, but then that parts of the environmental problem rather than the domain of RBI, so I will give the AAA marks to RBI in terms of cleaning up the system.
Sanjay Nayar CEO and Country Head KKR India
Q: You have been a career banker and now a private equity investor. Do you think the attack on high inflation is now written into the law solidly enough that we will not transgress 6 percent inflation at least in the foreseeable future?
Nayar: I think so. I think he has done clearly his portion of the job much more than what I think one would have hoped for. In any kind of reform, he has got a role to play and so does the government. I think he has done ample amount of his role by clearly giving a message that inflation targeting is critical.
He is leaving enough room for growth which is not necessarily driven just by easy rates but he wants investment spending pickup; I think he said that repeatedly. I think he is trying to create capacity for credit by pushing the banks to lighten up on the non-performing assets (NPA). So, if you look at the banking sector reforms, I think he has played a solid more than 65-70 percent of his role here.
Q: I wanted to scratch that point a little more about the digital part with you. You also have a lot of international experience; you headed the Indian unit of Citi Bank for so long. Now with payment banks, with small banks and with the unified payment interface coming in, has he led us very nicely into a new era of digital accounting and therefore a huge area of analytics which might lend to financial inclusion of an unheard of level? Are we on the throes of some kind of a digital financial revolution what Nilekani called the WhatsApp moment in the financial sector?
Nayar: I don’t know how to classify this, as a WhatsApp moment or not, but clearly what he has done is he has tried to keep in tune using the infrastructure India has with the all kind of unique identification numbers and the kind of technology leap India is taking, he has kept in tune with that. I think he has addressed the fact that there is a dire need for financial inclusion at a low operating cost and the brick and mortar can only get you that far.
I think he is leveraging the mobile technology so he has enabled a lot by giving all these kind of new platforms for us to utilise. Now, I think the question is for the entrepreneurs and for the telecos and for the companies in the banks to utilise at the best. My worry in all these things is that there is a wave that comes in, everybody is now going completely euphoric about these things. Ultimately you have to have a model that works for the people who provide the service and those who get the service and I think we have a long way to go there.
However, he has given the enabling environment keeping in tune with technology and India’s huge fragmented widespread market. Now it is for the rest of the people to create the right business model quite frankly.
Jayesh Mehta Managing Director & Country Treasurer Bank of America
Q: We had this huge thrust on anti-inflation and therefore even liquidity deficit practised as part of not allowing aggregate demand to increase. Do you think Rajan has addressed the liquidity issue adequately now and you expect transmission to be more smooth in the months to come?
Mehta: I think the liquidity stance which was changed in April that has been followed through and it has been followed through little bit earlier than what it was projected to. He has followed that up with today\\’s reemphasis on liquidity. Just being neutral, like today\\’s announcement was more like we would rather err on the excess rather than trying to be neutral and err on the negative liquidity side.
So, that has given a quite a lot of assurance and that definitely has impacted a lot and therefore the first transmission which has happened is on the government bond yields. So, in last 4 months you can actually see as the liquidity came in the yields have really moved dramatically.
Q: What is your sense about the way things will pan out? You expect yields – I guess the new 10-year is on the anvil perhaps in some weeks do you see 7 percent for the 10-year very soon? Therefore do you see even bank lending rates falling?
Mehta: Now with liquidity and assurance of liquidity being there, it is not just there for a week and fortnight and going away. I think they are going to make sure that liquidity is going to be slightly on the surplus mode and if that remains it is just a question of time that we will see a 6 handle, definitely going below 7. So, it is just a question of time, unless something dramatically happens globally. However at this juncture the trajectory looks pretty good even without rate cut I am talking about going below 7 and that should be happening very soon.
DK Joshi Chief Economist of CRISIL
Q: What’s your take, are the upside risks to inflation genuinely there? Do you see rate cuts and more importantly do you see the cost of money falling for borrowers?
Joshi: Well, I think as far as the upside risks are concerned, obviously, there is a clearly visible I think inflation is inching towards the upper bound 2-6 percent and it’s the food and every third quarter policy the swing factor for the monetary policy is what happens to the rains and fortunately I think rains are proceeding well and particularly for items like pulses where the area under production has gone and also the unirrigated parts of under cultivation in pulses I think they have got good rains, so I am pretty certain that going by the past trends, which the pulses have a 3 year cycle and pulses inflation should actually come down sharply and even become negative.
I think for other food items there are many idiosyncratic factors, so it is very hard to predict what is going to happen to them, but the overall message from the good monsoon is that there will be general taming of food inflation and that is the only worry at this juncture, because other drivers of inflation are not firing from global perspective the crude prices have actually come down and even the wage hikes that are being given, they are being given in an environment of excess capacity in the system, so they are becoming generalised I think is less of a risk at this juncture, but I think as I said, you have to keep your fingers crossed. If you ask for our call, we believe inflation will settle at an average of 5 percent for this fiscal year and as Siddhartha was pointing out, the second half will see inflation nudged down definitely from the current levels.
As far as the transmission is concerned, the 2016-17 in fiscal year and beyond I think they will see two effects one is the monetary policy always has a lagged impact for whenever rate cuts are initiated last year and cut by the banks, I think their impact on GDP etc will now be felt and with focus on liquidity and probably possibility of excess liquidity scenario interest rates will come down across the board, but the issue right now is that is there enough credit demand from the industrial side, which is not there, so the credit will be expanding more towards the retail side and less towards the investment activities, because there is very little appetite for from private sector for reigniting their investment plans. So I think the transmission will be there, but it will be felt very mildly and I don’t think it will help in reviving the investment cycle at this juncture.
Q: Do you think the battle against inflation is now entrenched in the system, what marks would you give to the Rajan era for the anti-inflation fight?
Joshi: Well, I don’t think I will give him marks, but I will definitely say that as far as modernisation of monetary policy is concerned, via inflation targeting, via monetary policy framework, whether he is there or not the system is in place, which will ensure and even now the government has also ratified that, so there is a system in place which will ensure that that inflation stays within that ground and the central bank will be solely focussing on that now.