Rate cut no substitute for enterprise and innovation: RBI governor
19 September 2015
Reserve Bank governor Raghuram Rajan on Friday said the central bank's role is not just to reduce interest rates on demand but rather to work towards monetary and financial stability by keeping inflation under control over a longer period.
Rajan said the key tasks for the RBI are to keep inflation low not just today but well into the future so that we get moderate nominal interest rates that satisfy not just the vocal borrowers but also the silent savers. We also need to clean up the banking system of distressed assets so that it is in a position to fund growth again.
He said the RBI is well aware of the difficulties industry faces and is working as hard as possible on improving the environment. But, he said, ''India must resist special interest pleas for targeted stimulus, additional tax breaks and protections, directed credit, subventions and subsidies, all of which have historically rendered industry uncompetitive, government over-extended, and the country incapable of regaining its rightful position amongst nations.''
He said cheap money is no substitute for enterprise and innovation. Rajan was delivering the C K Prahald Memorial Lecture in Mumbai on Friday
Brazil, he said, offers a salutary lesson. Only a few years ago, the world was applauding the country's thriving democracy, its robust economic growth, and the enormous strides it was making in reducing inequality. It grew at 7.6 per cent in 2010, and had discovered huge oil reserves which the then President Lula likened to ''winning a lottery ticket''. Yet the country is expected to shrink by 3 per cent this year, and its debt just got downgraded to junk. What went wrong?
''Brazil tried to grow too fast. The 7.6 per cent growth came on the back of substantial stimulus after the global financial crisis. In an attempt to keep growth high, the New York Times says the central bank was pressed to reduce interest rates, fuelling a credit spree that overburdened customers are now struggling to repay.''
What will be critical in success, as the prime minister said earlier this month while meeting industrialists and bankers, is that business has to believe in the tremendous possibilities and opportunities the nation has, and be willing to take the investment risks that will generate returns.
No country succeeds without believing in itself – I do not mean the unwarranted belief that we are intrinsically better than everyone else but the confidence that given our population, our demographics, our massive infrastructure investment opportunities, and the wide range of capabilities in our people, the arc of history is turning towards us.
While Indian business has been hurt by public authorities' acts of omission and commission in the past, it has to look forward. And I have no doubt that as business presses people in positions of public responsibility to make the changes needed to ease doing business, we will respond.
What specifically are we doing on the environment in the financial sector and what more do we need to do? Let me turn to that, dwelling specifically
He said there is a need to foster competition and innovation, by creating an environment hospitable to those who do not belong to the status quo club, on improving the structures we have to deal with distress, and on strengthening human capital in the financial system.
''In order to get sustained growth, we need more competition, especially from new entrants who are in a better position to reach hitherto excluded parts of our economy. After a decade of no new entry, we will see two new private banks this year, and a large number of payment banks and small finance banks next year. Licensing is likely to go on tap.''
He also allayed fears of unfair competition, saying that competition is only unfair if it is not on the same playing field. ''New entrants have no privileges that incumbents do not already enjoy.''
He also said there is a need to distinguish between speculation and market manipulation. Speculators are much maligned in India and often confused with market manipulators. The two are different. Speculators take positions in an instrument and thus take risks, much as an investor in a stock takes risk. They typically take the necessary other side to hedgers. Without speculators, there would be little depth in most markets and prices would be distorted.
The market manipulator moves thin markets in a preferred direction so as to make a quick profit, in contrast to the speculator who simply takes a side she thinks will make money.
''In the securities we regulate, we intend to encourage broader participation while discouraging manipulation,'' he said.
He said the RBI and other regulators are working on a streamlining market regulations and the new set of regulations are expected to be ready by the end of the year.