Below is the verbatim transcript of Aditya Puri's interview on CNBC-TV18.
Q: How much points will you give first monetary policy statement on a scale of 10?
A: I will be a nut not to give a 10.
Q: What does it mean basically to a bank? Does it mean a higher cost of money because repo rate has gone up?
A: The difference from where I can see your question is coming from and the way I look at it. I look at it over a period of time. So, I would rather define where I see the policy taking me and the economy than just saying what happens to this repo rate because that rate can also change depending upon the state of the economy.
I am very happy with the policy for two reasons. One, it clearly sets out the basis on which policy will be decided and what is the end result. So inflation is important, growth is important and the rupee stability is important.
It also says that whatever measures were taken in July to stem the movement of the rupee based on favourable trends continuing will be unwound. The disruption came with the July measures.
First thing he has done is on the short tenor 75 basis points down, this will bring the call rate down, the certificate of deposit (CD) is already down to 9.5 percent, it will bring the CD rate further down. It will bring the rates in terms of bulk deposits down which is a large proportion, it won't happen overnight, so don't ask me when will you lower your base rate because there is an issue in transmission.
He had clarified that liquidity will also come as the foreign currency non-residential (FCNR) deposits keep coming in and the regular monetary policy will be restored once he has confidence in terms of the actual functioning of the economy. So, I don't think we could have asked for more.
Q: The last action from the previous governor was that of cutting rates repo rate. Now the repo rate has been increased. Also, when we asked for the next move he said the repo rate and the marginal standing facility (MSF) rate have to be only 100 basis points eventually and the MSF rate will do more walking. The repo rate has bottomed out and is already 7.5 percent, are you getting a feeling that base rates will actually rise?
A: Base rates may rise temporary not because of the policy because people have taken deposits one year deposits were at 10.5 percent, short-term deposits were even higher so, that cost may be reflected in the base rate.
With regards to repo rate going up or down, inflation has also gone up. So, what he said was that repo will move both ways depending upon the state of the economy. If we have good monsoon, if the rupee remains where it is then why do you not look at 7.25 percent again.
So, I am actually quite happy with the statement that has been made that depending upon which way the dice falls it could go up or down but inflation is important and so is growth. He also wants to see the rupee stability or the strength that has possibly come in and the measures that the government has now taken will they result in growth? If they result in growth which is my own thought, too much emphasis on growth interest rate is not the only issue, I think our growth has stalled for other reasons.
Q: What is your next step on interest rates, base rates and deposit rates? What will be the banking industries response because bankers were still pricing their loans on the repo rate as the base because everyone thought that this MSF is an artificial and temporary phase and so, people were basing it on repo which has gone up. What will you do and what do you expect the industry to do?
A: You could see a marginal increase in base rate. More of an adjustment in terms of understanding that the tight money conditions will remain for a while, it is not that they were based on the repo rate. Lot of people had sat back and said let us see if this is temporary till September 20, then there is no point raising it.
Let us wait and see what is the stance of the RBI and if the cost will remain high to some extent then we will raise it. However, any rate increase will not come because of the policy. It will come because of the last three months to shore yourself up because of shortage of liquidity that a lot of people have run and taken bulk deposits which will be reflected. Again, base rates just like repo, could also come down very fast.
Let me give you another scenario, what if the USD 15 billion come in under FCNR and he doesn't mop up that liquidity, interest rates will go down. So, I am just being a little cautious because there are lot of balls in the air which is why I think while setting the roadmap he has not taken definitive action because while the green shoots are great, a little caution is warranted to see how it actually pans out.
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