bank privatisation: RBI Guv on bank privatisation, crypto, UPI and more

Any inflation forecasting without a rupee level in mind is going to be tough. So Reserve Bank of India will have to work with the band which they feel is the right band for rupee?
We do factor in the eventual exchange rate of the rupee vis-à-vis the dollar. It is a function of the market and we analyse how the exchange rate is going to evolve during the current year in the next six months and in the next one year. In the monetary policy report which we bring out twice a year, we do give out the level at which we have assumed the rupee to a dollar rate for our calculations. We give it out once in six months and there is a reason for that because if you give out rates every time, then sometimes it can create very distorted expectations in the market also.

Deposit growth is lagging credit growth. You appealed to the banks last time in terms of what kind of lending they should do but is there something which needs to be done immediately because when we speak to even , on a large base they are talking about a 13-14% credit growth and deposit growth is nowhere close to that. Could that create a mismatch which RBI now needs to address?
The overall credit growth according to the latest data is 14.5% as on 29th July year on year. So to sustain a 14.5% credit growth, we need capital. Thanks to our working very closely with the banks and nudging the banks, almost all banks – both public and private sector – have raised capital. We also need funding resources coming from deposits.

Now what I said in the last MPC and I would like to reiterate that again is that if they have to achieve a credit growth of 13%-14% or 14.5% or 15%, the banks will have to raise resources by way of increasing the deposit rates and it has happened. Now every now and then, some bank or the other are seen adjusting their MCLR and increasing deposit rates.

On Monday evening, some banks raised the rates. They have introduced new deposit schemes at slightly higher rates because banks will have to raise their deposit rates so as to meet their credit requirements. So it will happen, the credit growth is a little below 9%. At the moment, it is about 8.7% and going forward it should pick up.

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Since the government has a very big borrowing target to raise from the bond market, the bond yields in April and June were threatening to go to 8%. Does the Reserve Bank of India intervene or are you okay with where the bond yields are right now?
In the middle of June, the 10-year benchmark bond yields touched about 7.62%. Thereafter, it has moderated and at the moment, the bond market is steady. As I have said, inflation expectations have moderated, inflation is actually moderating and so at the moment, the bond market is functioning in a very orderly manner. We come in if we see some disorderly developments or some amount of disorder or disruption in the market due to various reasons.

Did you notice that in April and May?
No, it was for a few days. There is no room for a knee jerk reaction by seeing the development of just two or three days. We have to watch the situation and then act. RBI intervenes only if it is necessary and developments over a period of just a few days cannot be the determinant factor for taking action.

You have called crypto dangerous, you have used the word that it could create instability in the financial sector. But that was a comment when crypto price levels were very different. Things have changed at the price point and participation level. What are your thoughts on crypto now?
I think I am happy that we sounded those warning signals and I would like to believe that a large number of people would have taken note of the warning signals and the concerns expressed by the Reserve Bank and I would like to believe and anecdotally we are aware that many people did not invest in crypto or of pulled out of crypto, thanks to the kind of caution and concerns that emanated from the Reserve Bank.

Crypto can create a lot of financial instability in terms of the ability of the central bank to determine monetary policy. It can also have an adverse impact on our exchange rate, on capital flows, on banking sector stability and the potential for being used as a tool for money laundering and for illicit transfer of money.

The prices of something which does not have any underlying base, will not remain high all the time. Therefore it may crash and it has crashed. Ultimately in a situation like this, it is the small investor who loses money and therefore it is a big risk for the small investors also.

The blockchain technology has various applications. The benefits of the technology are already being capitalised and therefore we flagged those concerns. Countries like India are differently placed from advanced economies when there is a talk of dollarization of economy, if I am sitting at the other end of the globe and if I am in the US, I will be very happy; but if I am in India, I would not be happy whether as an individual or as a central banker. It is not a good thing for our economy to happen. Therefore for emerging market economies, since all the cryptos are denominated in the hard currencies by and large dollar, will not work in favour of countries like India. It may work in favour of the advanced economies.

There seems to be a feeling that fintech in India will be more and more regulated and for a sector which gets the innovation value to a country like India which is creating jobs, it is taking the financial sector to a different level. Why is there a perception that the Reserve Bank of India wants to regulate fintechs?
We are in fact encouraging fintechs. We have set up an innovation hub in Bangalore. Look at the large number of steps that we have taken. We have come out with the digital lending regulatory framework. It is largely supportive of the fintech sector. If you allow a new thing, we have to see what kind of risks it is bringing in to the economy and those risks will have to be mitigated. Unless the regulator acts, there will be uncontrolled risks.

I will give you a very simple commonplace example. Every innovation has value. Say I am an innovator and I innovate high speed cars and I feel that my innovation is the best thing that has happened. But I have to drive that car on the roads of Mumbai or on the roads of any Indian city. I cannot say I will drive at 200 km speed, forget about pedestrians, forget other traffic, forget speed breakers, forget the rest of the road. So the speed of my car has to be regulated. It is precisely that. Therefore regulation comes in.

We are committed to encouraging innovation, especially in fintech, we will be supportive of innovation. At the same time we also try to assess what risks it is building up for the system, for the economy and those risks will have to be addressed not by the regulator, who will tell the player himself and the players will have to address those risks. As the regulator, it is our responsibility to see that there is no unbridled, unchecked risks build up because ultimately the negative consequences and the impact of that will be hugely adverse.

I want to very clearly say that we would encourage innovation. We are supportive of innovation in fintech but at the same time we have to evaluate what kind of risks are coming in, what kind of risk build up is happening and whether they are getting addressed or not.

The Reserve Bank of India last week came out with a paper on whether there should be a charge on the payment gateway UPI. The government has come up with its own views on that. Do you think innovative payment gateway like UPI needs to be charged? It is like saying if I was using money order and demand draft, the customer ultimately was paying?
We have come out with a discussion paper and our idea was to get stakeholder comments and suggestions. So let the comments come. We will examine them and move forward.

Can I request you to clear the air on the RBI stance on public sector bank privatisation?
As a regulator of the banking sector, we are neutral to ownership. That is the stand of the RBI and that is the bottom line of our stand. We are ownership neutral. We prescribe certain regulatory guidelines and it is our job to ensure that those regulatory guidelines are adhered to and the banking sector functions in a well regulated manner, banks are robust, well capitalised and their financial parameters are strong. We are agnostic to ownership.

There was a bulletin paper produced by some of our researchers. It does not represent the official view of RBI. But there was some amount of misinterpretation in the market. If you read that sentence carefully, they have said big bank privatisation may not be as good as following an orderly and calibrated approach as is being done by the government. So the first part of the sentence was cut out and the latter part of the sentence was cut out and only one thing was taken out of context. Since it was being attributed to the RBI, we wanted to clarify. We simply said that it is not the official view of the RBI and we only said that the authors, the researchers have only said this, they have not said anything beyond it.

The official stand of the RBI is that we are ownership neutral. It is for the owners of the banks to decide how much of shareholding they want to retain.

Big banks are becoming bigger in India as they have technology, they have brand, they have reach. Small banks are not getting marginalised, but they are not growing. Who has the right to win in the financial sector?
I think it is the market. Everybody, including the small banks have to survive in the market and they have to become more agile. In fact, some of them are quite agile. Let us not think that sometimes two large banks also can develop an amount of inertia and therefore size of the bank would matter.

I am not saying it is irrelevant. It is relevant but the efficiency of a bank depends not so much on the size, but largely on their agility, risk assessment, governance and what kind of technology leveraging they are doing.

You have been dealing with extraordinary circumstances of war, a pandemic, liquidity like never before, inflation like never before and I always said that if a pantheon of great governors had to be made, your name would be on the pedestal. But who is your favourite RBI governor who has influenced you the most?
There have been many of them. It is not fair on my part to comment on my predecessors or for that matter when I move out to comment on my successors. All of us follow that kind of understanding – the governors past, present and future. That understanding prevails. But I think what is more important is RBI as an institution. Governors come and go. What is more important is what contribution we are able to make to the institution and how the institution responds to challenges and how the institution is able to maintain financial stability and fulfil whatever is expected of the institution.