The Reserve Bank of India (RBI) and the finance ministry generally work well together, Sanjeev Sanyal, principal economic adviser to the government, told ET in an interview. He raised some concerns about the liquidity situation with regard to non-banking finance companies (NBFCs) and feels the rupee is very competitive now. Edited excerpts:
RBI has raised the issue of autonomy and government interference. What are your views?
The Reserve Bank is a valued institution and enjoys a lot of autonomy. It is overseen by a board where there are government representatives but also independent members. Like all central banks and finance ministries around the world, there are occasional differences of opinion but I think the partnership generally works well.
How worried are you about the NBFC situation?
Both RBI and finance ministry are watching the NBFC situation closely. While the problem got triggered by concerns over IL&FS, we recognise it has impacted the wider NBFC sector. We took quick action to ringfence the original problem. Other steps include widening NHB’s refinance window for housing finance companies. If necessary, more steps will be taken to ensure that credit markets keep functioning. Since inflation remains well within the target range, the Monetary Policy Committee decided to keep the benchmark rate unchanged in the last meeting. This was also helpful.
Would you want the RBI to open some kind of special window? Has the government asked for it?
It is a measure that has been tried in the past, during the 2007-08 episode. The question is at which point the RBI decides it is necessary to exercise the optionand in what form. We do have regular discussions with them but I am not in a position to provide details.
Are you seeing this as primarily a liquidity issue for NBFCs or a bigger solvency problem?
It is not a solvency problem. Most large NBFCs have good assets and balance sheets, but some are facing rollover and asset-liability mismatch problems. Therefore, this is a liquidity problem, which is arguably an easier problem to solve. In the specific case of IL&FS there may be more structural issues but we should let the new management work out the real extent of the problem. A few small NBFCs may also have issues but they are not a systemic risk.
Is there a need for tightening regulations for NBFCs?
There is a longer-term financial hygiene issue. More stringent regulation may be needed and entry barriers revisited. Nonetheless, there is a more immediate problem of credit markets being dislocated and routine rollovers not happening. The rollover issue has to be dealt with by making sure that markets normalise as soon as possible.
With oil retreating from the recent peak, has the macro concern eased?
I am not in the business of predicting oil prices. We are an oil-importing country, so we always welcome a fall in global prices. Despite the recent decline, however, international oil prices remain elevated.
Measures have been taken to support the rupee, including higher tariffs. Is more needed?
We have increased tariffs on some non-essential items. Let’s be clear that it is not a first-order response to recent rupee depreciation. It is a limited defensive action given the uncertainty in the external environment. We remain committed to an outwardoriented economic model. This is not, as some have suggested, a return to old-style import substitution. We are doing limited defensive action in the face of an extremely unstable international trade environment. This is not strategic, this is tactical.
Is there a need to raise more dollars? There is talk of NRI bonds…
We still have a lot of forex reserves – almost $400 billion. The RBI didn’t spend the reserves aggressively despite a fairly large correction of the rupee, which has left us with significant amounts of ammunition. The reserves give us a buffer that allows us to watch developments in the external environment: trade wars, withdrawal of financial liquidity by the US Fed, global oil prices and so on. Given the changing environment, we need to calibrate our response carefully and forex reserves give us that cushion. In other words, every option is open, including nonresident deposits. With domestic growth strong and inflation under control, we need not rush into anything.
What is your view of the rupee following this sharp correction?
I would argue that at current levels, the Indian rupee is more than competitive. I would not be surprised if the Indian rupee is stronger from current levels in the medium term. Of course, we need to pay heed to the exchange rates of all our trade partners and competitors, and not just the US dollar.
How do you see the recent US-China spat playing out? What does it mean for us?
One should go with the assumption it may last for a while. Therefore, we should be prepared for an uncertain global trade environment for an extended period of time. In that context, we should be open to making adjustments to our trade strategy. While there may be disruptions, we may find new opportunities to insert India into the global supply chain.
The trade tensions between the US and China seem to have created a situation for global supply chain adjustments. Can India benefit? There is a new committee, headed by Dr. Surjit Bhalla (Sanyal is also a member) that is looking into this specific issue. We have taken a look at some of the sectors, both negative and positive implications. Flexibility is the key to how we respond to the situation. Also, we should not forget that we will continue to honour our existing international obligations. The recommendations will be submitted by end-November.