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No beating about the bush.
ML: Now that the economy is showing signs of revival, Dr Manmohan Singh has indicated that he may look at withdrawing stimulus measures. Where do you see the economy going forward?
RVS: We should surely see a growth of more than 6-6.25%. The challenge is whether we can continue in this manner. The signals that we are receiving from the global economy are not encouraging. But we are also getting signals that other economies are stabilising. So we can easily maintain our growth rates and then, through local investments, especially through infrastructure, we can grow further. Hopefully, agriculture will start reviving during this rabi season and if next monsoon could be better, we can look for growth rates of more than 7% in the next financial year. Whether it would be 8%-9% is a bit too early to judge given that uncertainties in the global economy have actually worsened in the last few months. The relative contribution of exports to GDP is quite significant. Especially in case of software services and textiles, this impact is quite heavy. The other uncertainty is related to the domestic market. For instance, the prime minister has mentioned that the stimulus may be removed next year because it puts a great deal of pressure on the fiscal (position) of the country. In that sense the government may decide to remove the stimulus altogether or reduce the size. These are two important determinants. We have achieved stabilisation, but now we are talking about 7%-7.5% growth. So we have now already seen the dip; today we are seeing the correction to take us beyond the dip.
ML: With huge government borrowings, there is a lot of pressure on interest rates. Although the RBI didn’t make any changes in the key rates, they have indicated they would gradually hike rates.
RVS: The RBI has taken the first step. They have removed various measures given earlier. For instance, previously, reduction of SLR meant that a great deal of liquidity was released into the system. Similarly, they had provided certain refinance facility to banks and provided leeway under the export refinance scheme. I think they were also looking at certain measures on provisioning and capital requirements. Now they have got back into action and have increased the provisioning norms. So the RBI has already embarked on the first leg of the journey, by withdrawing these monetary measures. They have increased SLR from 24% to 25%. So slowly they are trying to ensure that the balance sheet strength of the banks is protected and enhanced. Banks in the economy have to be strong to withstand the volatility that comes in from time to time in the asset markets or in the overall economy. In the last year they had deliberately taken a low stance. Now, the focus is on higher capitalisation of banks and enhanced capacity to sustain credit-related losses through higher provisioning. Even though we don’t treat a hike in SLR as a rate hike, it is in a broad sense, a rate hike. Even though the overall banking system holds around 27% in SLR, not every bank holds that much. There are many banks which hold lower than the standard SLR requirement, who are permitted to meet it in various other forms. So for such banks, the deficit has actually increased by another percent. These banks will be forced to cut the deficit to the extent of 1%. For others who are holding a surplus, the quantity of surplus has reduced. So I do not think we should look at this hike in a narrow perspective in terms of current SLR holding versus actual requirement. The excess securities that banks hold enable them to borrow funds from the collateralised market or through the RBI window. They could go to the CBLO platform from CCIL, an anonymous terminal where a bank can give its G-Secs and borrow funds against them. So to the extent that banks are surplus, this is actually collateralisable and funds can be drawn against it. The moment this threshold goes from 24% to 25%, the ability to borrow also reduces to that extent. So, this is a backdoor way of establishing a rate hike. The fact is that it is as good as a CRR hike in that sense. So, that 1% hike does have an impact on the liquidity in the system. Similarly, earlier banks could raise export refinance to the extent of 50%. It has now been brought back to 15%, which existed prior to 2008. To that extent, there is a sucking away of some liquidity. So my sense is that the measure has been very cleverly put into the policy, so that people don’t panic.
— Sanket Dhanorkar [email protected]