An officer of the Indian Administrative Services, Dr Yaga Venugopal Reddy, has spent most of his career working in the areas of finance and planning both at the State and Central level. Dr Reddy, who has keenly pursued his interest in economic research, has been a Deputy Governor at the Reserve Bank of India since 1996.
In an interview with Equitymaster.com, Dr Reddy, Deputy Governor, RBI, spoke of the current economic scenario and the monetary policy.
EQM: Your general view on the economy especially in light of the slow down in the industrial sector?
Mr. Reddy As indicated in the policy statement, we do recognise the fact that there is currently a slowdown in the industrial sector. But hopefully the agricultural sector should perform well in the current year. Exports have performed well until now. Therefore, we expect the GDP growth in the current year to be around 6% to 6.5% as it has been in the last two years. It is optimism but it is based on realistic estimates.
Besides, oil prices have also come off and we have enough of food grain storage. The prevailing external scenario is fairly comfortable. Under these circumstances therefore you will find that the monetary policy has emphasised the provision of adequate liquidity to ensure adequate credit, which will support growth and revival of investment demand in the coming year. It is based on this background that monetary policy has been formulated.
EQM: How critical is the next monsoon to overall growth estimates of RBI for the year March 2002?
Mr. Reddy There are two factors. One is related to agriculture. Even though agriculture itself may contribute a small portion of the GDP, agricultural demand is critical for the rest of the economy. So in that sense you have to recognise the importance of this sector. Considering these facts, agriculture will perhaps have a say in which end of the range GDP will grow. If agriculture growth is good, we could well register a growth of 6.5% or else 6%.
EQM: What has been the RBI's focus in this Monetary Policy? You have mentioned creating investment demand?
Mr. Reddy Again I would say there are three key factors. One is contextually what you said is right i.e. is addressing the issue of credit growth plus maintaining the interest rate flexibility. Second are the fundamental changes that are required in the monetary policy management and development of the financial markets. In the financial markets, we have aimed at converging the improvement in the legal, institutional and technological factors, so that in a two to three year’s perspective, the financial markets should become world class.
The third area of the focus is the banking sector. In the banking sector, the objective is to improve the competitive efficiency amongst the bank and aligning with the international standards of prudential regulation. So the second and third is really a foundation for the next three years.
EQM: How would you rate the developments of debt markets in the Indian context?
Mr. Reddy Yes, as you would have noticed in terms of primary dealer systems, we have developed significantly and we have a range of instruments available right now. But the most important is the incorporation of clearing corporation. And more importantly I think is that we have introduced a provision for retailing government securities, though in a small way. We have made a beginning by identifying the possibility of appointing sub-brokers outside the dealing mechanism.
EQM: RBI has announced a preference for further softening of interest rates during the course of the year. In view of the large fiscal deficit and the recent cut in rates would still lower rates be sustainable?
Mr. Reddy The emphasis now is on flexibility in interest rates so that we arrive at an appropriate interest rate, which of course would become reality when fiscal deficit is contained. But the signals are positive with the enactment of the Fiscal responsibility Bill. But we have to wait and watch. Fiscal deficit continues to be extremely important factor in determining the fate of development of the financial market.
EQM: Does Madhavpura’s involvement in the ‘scam’ highlight the lacuna in the regulatory mechanism for cooperative banks? (The policy has spoken about a new supervisory structure).
Mr. Reddy RBI has been proactive in almost all the occasions. But I would like to add that RBI has also acted proactive in case of urban co-operative banks (UCBs) also. The problems faced by the UCBs were identified well in advance by appointing the Madhav Rao committee, which recognised the weaknesses of the UCBs. They also gave a set of recommendations. But they involved number of changes including legislative changes. The basic problem hitherto was dual control. The proposal now being made is instead of having supervision with the RBI, can we have a supervisory body. This is only a proposal.
But I would say that RBI has been proactive in identifying problems and coming to the specific issues like Madhavpura, it is a case of fraud where every possible guideline has been violated. So, in that case you can’t treat it as a systemic failure. But what this fraud has brought to life is that the system also has some problem. And this is the time we act on it so that it does not happen again.
EQM: Is there a case for a super regulator now?
Mr. Reddy I would answer to this question in three parts. One, the concept of super regulator is somewhat new. Second, both in theory and in practice much can be said on both sides. Thirdly, in the Indian context, if you want a super regulator or otherwise, the decision should be taken on professional grounds after examining all aspects rather than a reaction to a case of a fraud or two. A view should be taken objectively not reactively.
EQM: India's export performance has been pretty good so far in FY01. Growth is likely to be supported by the RBI’s decision to cut refinance rates. How do you see India's foreign trade faring in coming months?
Mr. Reddy Our own assessment as you would have noticed is that much depends upon the performance of the world economy. On the export front growth would be higher than the growth in world trade. The current account should be favourable, well within 2% of GDP. If you look at interest rates, earlier it was a fixed rate. But now it is just a ceiling and rates would now depend on the prime-lending rate. On the basis of available evidence, it looks, as though the resultant rate of refinance would be around 8.5% to 9%.
EQM: When can an Indian expect to buy shares or mutual funds in the overseas markets?
Mr. Reddy Well, it depends on the progress of the capital account liberalisation with regard to which Dr. S S Tarapore has specified the pre-conditions. He had indicated both the pre-conditions and the time frame. But time frame has stretched.
EQM: What has happened to the original plan to allow Indian mutual funds to hold 5% of their assets in shares of overseas companies?
Mr. Reddy As of now, the SEBI is working on this front regarding the operational details in consultation with the RBI.
EQM: Mutual funds and financial institutions have been barred from the call money market? What has been the rationale behind this initiative?
Mr. Reddy First at all, in terms of normal theory and practice, call money market is supposed to be an inter-bank market. Secondly, the Narasimham committee recommended that this should be an inter-bank market. But to do that we have to develop a repo market so that these institutions, which operate on the liquidity side, should have other ways of handling this. This will be done once the clearing corporation is established. So, therefore, it is not pushing them out but actually they will have better opportunities through the repo market. This will also optimize the system.
EQM: Where do you see the Indian economy in 2020?
Mr. Reddy What I visualize is that the current term prospects are more promising than the medium-term prospects and medium-prospects will improve if we concentrate on physical infrastructure like roads, ports etc as well as institutional infrastructure like legal mechanism. And the long-term prospects will improve if we concentrate on social infrastructure including education and health.