Moderator:

Thank you so much Sir, for joining us today. Ladies and gentlemen, as you all are aware the Governor Mr. Shaktikanta Das has been rated as the Top Central Banker Globally by Global Finance Magazine. He is also being conferred with the Governor of the Year Award at Central Banking Award 2023. He has cemented his position as someone who is adept at really making critical reforms. He has overseen the world's most innovative leading payments and its innovation and stirred India through difficult times and is playing an instrumental role in catapulting India into global arenas with his crystal clarity, intuitive originality, his analytical mastery, and most importantly, his ability to navigate through the clutter and come up with razor-sharp perspectives. Ladies and gentlemen, a big, big applause for Mr. Shaktikanta Das, Governor, Reserve Bank of India. Thank you so much, Sir.

Tamal Bandyopadhyay:

A very good evening and welcome to the grand finale. India's largest BFSI Summit and what a way to have a conversation, candid chat with the RBI Governor, Shaktikanta Das. He is the second Governor in the RBI's history to have a six-year term. And you do not know whether the six years could be seven or eight years. We will get to know a year later.

Just before coming here, the Governor was asking me what kind of bowling you would do, spin or fast or medium pace? I said that whatever I try to bowl, this is one batsman you cannot get him out. You just cannot get him out when it comes to communication; he is the Central Banker. Sir, this lady has already stolen my thunder, but still, in the presence of 750 or 800 people here and thousands of people who are watching this on the web, officially on this platform, let me congratulate you on two things. You are ranked A-plus, Governor, globally, in the Global Finance Central Bank Report Cards 2023. You also bagged the title of Governor of the Year for 2023 by Central Banking in London. So, congratulations, Sir.

If it is a Central Bank's World Cup, India is the champion, and you are the captain of the team. Right? The only thing is it is not 20 overs cricket, it is not 50 overs cricket, and it is not even a five-day test match. It is a test match which runs for years, and which is a test match which had seen COVID, which has seen everything else. Incidentally, the Governor is very fond of cricket, that's why I am giving the cricket analogy.

Let us start with something macro. Once again, another congratulation is due because we are a part of the JP Morgan Global Index which everybody had been waiting for. India has a 10% weightage in the Global Diversified Index in stages from June 2024, with 1% added every month.

You have been preparing for quite some time. In 2020, first, you removed the cap on the foreign ownership in certain bonds, you call it a fully accessible route and then allowing the banks to lend margin requirement for foreign investors, etc. Has it come a little faster than you wanted? Because of Russia's inclusion, you need to prepare the ground. Whether we need to have more of those bonds, which the foreign investors are allowed to invest in, we need to have more liquidity, and of course in this kind of geopolitics, always the interest rate risk and the FDI outflow can happen once you are integrated with the global segment. So as an RBI Governor, tell us frankly, Sir?

Shaktikanta Das:

Thank you very much Tamal. At the outset, let me also thank Business Standard for organising this event and inviting me to participate in the final session of this two-day event. Over the last few years, this particular BFSI event has emerged as an important event in the BFSI calendar of our country. My congratulations and compliments to the entire Business Standard team for achieving this.

Now, coming to your specific question, our effort over the last few years has been to expand the investor base in our securities market, especially the government securities market to expand the investor base and also to provide greater opportunity for participation. You mentioned the fully accessible route, we have also taken several other measures, and you alluded to a few. There is also for example we have permitted the domestic banks to offer margin facilities to the foreign portfolio investors, etc.

The inclusion of India in the JP Morgan Bond Index is their decision. The first thing that has to be recognised in this is that it is a kind of vote of confidence about the Indian economy and the Indian financial markets. I do understand from where your question is coming. Obviously, when you are included in a bond index, it works two ways; it leads to inflow, JP Morgan has given an estimate of US$25 billion to come over a period of time. But on the other side, it is a double-edged sword, as you know there are quite a number of passive investors who are mainly sort of influenced by your weightage in the index. So, the reverse can also happen. When your weightage goes down, the passive funds will immediately tend to move out. If there is some other development happening globally, there can be an outflow of funds. In this regard, I would like to mention that the RBI has a track record over the years, especially in the recent period, of handling large-scale inflows and large-scale outflows.

Last year, after the Ukraine war started, we did not see the kind of outflow which was there after the taper tantrum. In terms of market sentiment, overseas investors had greater confidence in the RBI's ability to service the outflow of currency. There has never been a doubt that the RBI would not be able to meet the dollar requirement. That was because of the reserves which we had built up. Our track record over the years and especially in the last few years when outflows happened is that it has been handled in a very seamless manner. Similarly, when inflows had taken place before the Ukraine war or during 2019, 2020 and 2021 when liquidity was easy all over the world, there were large-scale inflows, and we utilise that opportunity to build up our reserves. So, we have a track record of handling both sides of the so-called double-edged weapon of bond inclusion. We can handle large-scale inflows; we can handle large-scale outflows.

I would like to believe that given the overall macroeconomic stability and the financial sector stability that we have, even the passive investors are also looking at other aspects of an economy, the nuances of an economy, the strength, and the underlying fundamentals of an economy. So, we will not see that kind of volatility, but should something like that happen, the RBI has the capacity to deal with it and deal with it effectively.

Tamal Bandyopadhyay:

Thank you Governor. Very, very reassuring.

It is more than modesty that you said that. Thank you for your participation. It is a rare honour and privilege for us, you are gracing the occasion, and this is the fourth year in a row, that the Reserve Bank of India Governor, Shaktikanta Das finds time to grace the occasion of BSFI Business Standard Summit.

Sir, the second one is also the talk of the town, everybody talks about that. You – the Reserve Bank of India – played a key role in the internationalisation of the Rupee. Considering our trade, the size of our economy, the size of our exports and our rating, how much it is a stock and how much it is a reality? What does the internationalisation of the Rupee mean, Sir?

Shaktikanta Das:

Our officers have come out with a paper on the internationalisation of the Rupee, and they have shared some of their thoughts and some of the suggestions. The foremost point to be noted in this context is that the internationalisation of the Rupee is like capital account convertibility. The internationalisation of the Indian rupee is not a target but a process. There is a phased road towards greater internationalisation of the Rupee. There is not a particular point of time that we are trying to reach in one year, two years, or three years, not like that. It is a process, and that is because the size, the presence, and the impact of the Indian economy in the global scenario is expanding. The IMF, time and again, have reiterated it and recently in their World Economic Outlook Report also that India is going to be the fastest growing major economy in the current year as well as perhaps in the next year. So, the size of the Indian economy is growing and India’s contribution to world growth is now in the order of 15%.

The Director, Asia Pacific of the IMF, in a press interaction perhaps with Business Standard recently said that by 2028 India should be contributing to 18% of world growth. So, the size and presence of the Indian economy are growing, it is expected to be the third largest by 2027. So, in this scenario, the presence of the Indian rupee in various international transactions is something which should also happen alongside that. We are looking at it because dependence on one currency for international trade for any economy has its risks. For a moment, let me stress that we are not pitting the Rupee against the US dollar. There is no such issue at all. Some section of the media probably thinks, and they write about it. It is not so. It is not a question of the Rupee versus the US dollar. The US dollar is the dominant currency and will perhaps remain the dominant currency for international trade for years to come.

What we are looking at is to increase the footprint of the Indian Rupee in international trade, especially with regard to countries with which India has very close and active trade relations. We have signed the MoU with the United Arab Emirates for local currency denominated export and import. Sri Lanka has already recognised the Indian Rupee as a designated currency for their international trade. We have also entered into a similar MoU with other countries. The UPI linkage is also being simultaneously pushed. We have also provided the facility of opening a Vostro account and whereby the entire import, export will be settled by using the Indian rupee. So, basically what we are trying to do is to expand and widen the footprint of the Indian Rupee in the context of India's trade with other countries, with whom we have greater trade relations, and it is a process. We are moving towards that should happen as India becomes a bigger and bigger economy.

Tamal Bandyopadhyay:

Thank you Governor for the clarity. I am bringing up another controversial subject. If I remember correctly in 2021, it was on Business Standard BFSI Summit, we did have a conversation at your office address, Reserve Bank of India and that was a live telecast and webcast and that was probably the platform for the first time you spoke very frankly about your, I would say, allergy towards cryptocurrency. So, I am bringing the cryptocurrency part. You said that you will not allow crypto. You banned it. But we are talking about the latest IMF-FSB Synthesis Paper which talks about not banning but regulating, I am aware that you, recently in Delhi, said that there would not be a change in your stance. But Sir, my humble question is this, if following the IMF, whatever the direction they are getting, if the other countries say, yes, and the Indians start using their money overseas for crypto, I mean, is there any plan for that? You are a staunch believer in banning it in whichever way, etc., can you just give us some clarity?

Shaktikanta Das:

On cryptocurrency, I would like to say it with all seriousness, that it is a very serious issue and a serious threat to financial stability for all countries for global financial stability, especially for emerging market economies, that is something which has been recognised in the IMF-FSB Synthesis Paper also. Incidentally, the IMF-FSB Synthesis Paper also says very clearly that based on country-specific requirements, especially emerging markets and developing economies may, depending on country-specific situations, impose additional restrictions with regard to cryptocurrencies. The risks are well recognised by the IMF-FSB Synthesis Paper.

It has also been very well recognised by the BIS paper on cryptocurrencies. Everybody understands and agrees that there are serious risks, and that risk has to be looked at and managed very carefully. Why I am saying it is a very serious issue. I have seen comments coming from certain quarters, especially those who are in the crypto business. I can understand their concern that they are very critical of the RBI stance, and it is quite understandable. I do not hold a grudge against them. They are entitled to their views. But we have to look at it from the overall perspective of macroeconomic stability and I am not going into the details of what threat it poses to monetary stability, what threat it poses to the currency system, what threat it poses to financial stability issues. We have articulated them in the past and I am not going into it.

To summarise, let me say that it is a serious financial stability risk. It has to be dealt with properly. I have only one question to believers of regulation to ask, how will you regulate it? whom will you regulate it and regulate what? Before you think of regulating it, let us first understand, what is this cryptocurrency. Is it a financial product? Is it an asset? If it is an asset, what is the underlying? It is not a tangible thing. What is the definition of cryptocurrency? Till now, I have yet to see a credible definition of what cryptocurrency is.

The second thing is that I have yet to come across what you call any sort of credible explanation of the larger purpose that cryptocurrencies serve.

The third point which comes to my mind, and which is very important, what cryptocurrencies will do for international transactions or domestic transactions, whatever you call it in the digital mode, which CBDCs cannot do.

The fourth and final point is the basic question. It is a kind of a new currency system developing. Are governments and central banks across the world comfortable with private currency vis-à-vis a fiat currency, a currency issued by a central bank on behalf of the sovereign?

These are the four fundamental issues which need to be first understood before we talk of any kind of regulation, and these are very well recognised by the IMF-FSB Synthesis Paper. The leadership of the G20, at the G20 Summit, has welcomed the IMF-FSB Synthesis Paper because it is a good beginning to understand what the risks are and possibly how to deal with them. I am not using the word regulation, I am using the word, how to deal or regulate. I would like to use it in an interchangeable manner. It is a good beginning which has been made and the understanding should become deeper and the whole issue has to be very carefully addressed. We are not trying to stifle innovation. All innovation, which is in the overall public interest, must be supported and promoted. We are not against innovation, but innovation should serve a public purpose.

Tamal Bandyopadhyay:

Thank you Governor. Extremely emphatic that you will not nudge from your stance. Great to hear that, and I am sure you will convince in your forum with other central banks. Your focus, and rightly so, for the past six months on corporate governance in banks. You have called the bankers; you have called their boards and you had multiple meetings and repeatedly you have been focusing on that. That is the one side of the story. I do not think anybody would find fault with the Reserve Bank of India on that. But we do see like, we were outsiders there, there are certain problems with certain banks, but you do not talk about that. Unless this is an extreme case where you put your CGM as a board member there, etc., but otherwise you do not do this. Is it because you always talk about that our macroeconomic stability is immaculate, etc? So, you feel like you should not talk about that because the market knows, and the stock market accordingly rewards or punishes the banks that everything is in the public domain. Can you just explain to us your approach to governance? There are certain, I will not call them rogue, few banks which are ill-governed, the market knows about it, everybody else knows about it, you also know in your corridor that there are talks but you do not talk about it. Is it because you always talking about financial sector stability being immaculate?

Shaktikanta Das:

The headline is that the banking and the NBFC sectors at the moment are healthy and robust. You look at the aggregate level or you look at the individual entity level. We have seen the data for all the public sector and private sector banks. Even NBFCs, if you look at the top 20 or top 25, which would broadly represent 75% or 80% of the asset size of the NBFC sector, their financials are robust and healthy at the aggregate level as well as at the individual entity level. Now, governance is something beyond these numbers. These numbers ultimately in the long run flow out of good governance.

Our emphasis has been on good governance to ensure that these financial norms, these financial parameters which the banks and NBFCs have achieved over the last few years, thanks to a number of measures taken by the banks and the NBFCs themselves and by the Reserve Bank and also several steps by the Government of India with regard to public sector banks. Banks today, because of a mix of all these factors, are very robust and they are reporting very good numbers.

We want, firstly, these numbers to continue and improve further; secondly, we want underlying these numbers, certain basic deficiencies should not get camouflaged. Our analysis shows that what differentiates a good institution, a banking, or a non-banking finance company institution, from not so good one is governance. In governance, we are highlighting broadly three components – I have talked about it on several occasions – robust risk management, compliance culture including ethics and the strength of internal audit. These are the three points which we have been highlighting.

Now, let me again reiterate that, at the systemic level as well as at the entity level, our banks and large NBFCs are very robust. But wherever we see any deficiencies or any deviations or any problem building up somewhere, our job is to immediately flag the issue with the entity. We do not want to hit big headlines by making statements that such and such bank has a problem because sometimes in the public perception, the interpretation may be disproportionately high compared to the actual nature of a governance deficiency. Some action internally when we take it up with the bank, we know what exactly the deficiency is. We quantify that deficiency. We define that deficiency, and we want the particular bank or NBFC to take necessary corrective measures, which they do. But the moment, we want to hit headlines, you will unnecessarily be creating a kind of a crisis of confidence in that particular bank or NBFCs, which will be completely disproportionate to the nature of the internal deficiency. So, wherever we find deficiencies, our supervisory teams are in direct touch with the management of the banks, and it is taken up. I will not mention entities, but let me mention a few examples, like the IT system. Our seaside team have been doing a thorough verification and inspection of the quality of the IT system in banks and what kind of cyber security facilities they have, what kind of IT systems they have.

Wherever we have deficiencies, we have immediately flagged them to the management of the banks. Our supervisors have then sat down with the banks and insisted that please give us a timeline by which time you will take necessary corrective measures. When we emphasise on governance we do not want to create unnecessary panic and there is no reason for panic. Second, we want to play a constructive role to work with the management of the bank in a manner that the genuine problems are addressed effectively and ultimately it is the quality of governance in a bank or an NBFC which will ensure that the bank continues to be there.

You mentioned at the beginning that we are at the top and all that. I do not know whether at the top, but we are somewhere there. Now, it is easier to reach there but it is far more challenging to be there. I am not saying this for the RBI, I am talking about our financial sector and our financial institutions. So, as a regulator and supervisor, our approach is what I have just mentioned to you.

Tamal Bandyopadhyay:

Thank you Governor. You are doing your job silently; you do not want to create any noise. Sir, if you do not take any offence, I just want to understand one thing. Governance, you are very concerned about, but you are also looking at the business model. Just an academic question, again, do not take any offence. Is it the regulator’s job to teach banking to bankers and what should be their business model? The bankers are there. They will never ask you. But in private they whisper into my ears, ask the Governor these kinds of questions.

Shaktikanta Das:

No, they know it very well and I doubt whether anybody would have whispered it. But even if they have, and since I am addressing a bigger audience and a wider audience, which perhaps is watching through the YouTube. Let me say when we say business model, we are not referring to micro-level business models. Why is a particular loan given like this to a particular entity or why this interest rate is charged to a class of loans? We are not looking at that. When we say business model, it is from the point of view of the structure of the balance sheet of a bank. What kind of risk appetite the bank is providing for or does the bank balance sheet reflect? What is the risk appetite that it reflects which the bank surely taking? Whether that risk appetite is matched or backed by adequate risk mitigation measures. So, we are looking at more structural issues in the balance sheets.

We are also looking at the revenue models of the banks. Short-term risks, short-term gain versus long-term risks. We are looking at issues in which every banker does the asset/ liability balancing, whether they are appropriately managed, and whether they are appropriately balanced. So, when we say we are looking at the business model, we are looking at the business model of the bank from the point of view of the structure and the strength of their balance sheet. I have said it earlier that a problem which looks small in some corner of the balance sheet of any financial service provider, bank or non-bank finance company can become highly risky unless it has been properly understood and properly mitigated. Our emphasis is more on that.

The second aspect I want to say is, that to supplement what I have said, we have adopted risk-based supervision for the last several years. When you are doing risk-based supervision, you have to look at what are the risks the banks are taking, what are the risks and whether it has been properly addressed by the bank in its balance sheet. The recent developments of some bank failures particularly in the US and also in Switzerland; the central banks and the banking sector regulators and supervisors have woken up to the fact that they need to do much more intensive supervision.

There is a growing realisation among banking sector supervisors in several countries that supervision has somewhat fallen behind the curve. I can say with confidence that our supervision has by no means fallen behind the curve. It has remained in sync with the requirements of the growing complexities of the financial sector and the banking sector the world over. We are now even seeing more and more banking sector supervisors where central banks are the supervisors, they have started looking at the business models of the banks.

The failure of a particular bank in the US had a lot to do with the business model. Yes, it is a failure of the bank which goes down that path because the bank management is the first line of defence. The Central Bank is not supposed to do risk management. Risk management has to be done by the management of the bank first and foremost. Central Bank as the regulator and supervisor is required to keep oversight and point out where we feel there is a deficiency. So, when you say that looking at the business model, I would like to submit for consideration of everybody that we are not looking at the commercial aspects of their business models, we are looking at the overall risk matrix, the risk appetite and the risk mitigation and the structure of their balance sheet.

Tamal Bandyopadhyay:

I think all of us agree and discussed that this is the new RBI, we may call you in some sense very aggressive, but with the supervision and inspection of the Reserve Bank of India in recent times; you are much more aware and proactive. Bankers do admit that this is a new RBI. So, it is wonderful, and the world recognition is only because of that not apart from other things on the macro whatever you have done.

Sir, one more question which is a little irritating. We will go back to macro after that. There is a huge challenge before the banks to attract talent and retain talent. They, on the way in private, say is the compensation structure because you are not liberal at all. We know what happened in 2008 in the US and subsequently the global thing and all. But you get into this if you want to pay more than ₹20 lakh bonus, you cannot pay that at one go, you have to do this. So, these little, little things. Is it possible for the RBI to be a little liberal on that because they think that for attracting talent, the RBI is keeping an eye on the salary and perks, etc., come on the way?

Shaktikanta Das:

You said that banks are asking that. I do not know why they are not asking me directly. I do meet the bank CEOs. You can do a secret ballot and find out; they do not have to reveal it. But I do meet them one-on-one and whatever their concerns or points are, they always share with me one-on-one, and they do that with the deputy governors of the Reserve Bank also. So, there is that interaction which is going on. Now, coming to this specific question of attrition and the compensation package, etc., the public sector banks, it is with the Government under the law, so, we do not deal with that.

In private sector banks, the compensation package of only the CEO and other whole-time directors comes to the Reserve Bank for approval. Everybody knows that it is ultimately the nomination and remuneration committee (NRC) of the bank boards and the boards of private sector banks, which are expected to decide the compensation package of the banking executives including the whole-time directors and the CEO. In almost all cases except a few, we find that the increase in the package is not commensurate with the business growth of the bank.

On the contrary, if the bank's performance is going down, you cannot have a situation of excessive increase in the compensation package. So, very few cases where such things, we put some restrictions. In most of the cases, we return it to them saying, “Please relook and come back to us.” So, we do not put any restrictions on that.

Second and the most important thing is what we have done in our circular on compensation for the private sector banks, it is a principle-based regulation. We have said that the fixed pay and the variable pay, the ratio will be so much. Beyond that, we have not said how much should be the fixed pay, or how much should be the variable pay. We have only said that you maintain this ratio. The Banking Regulation Act expects us to do it. It mandates that the Reserve Bank should approve these compensation packages and ensure that they have used the term in the Act ‘excessive’. It should not be excessive, and it should be commensurate with the size, growth, performance, etc., of the banks.

Talking about attrition, I am adding one more point which you, although did not ask. We are also looking at the rate of attrition as a part of our supervision, which is seen to be high in certain private sector banks and we have asked them to look at it because, at the end of the day, every bank has to build up its core team, which should grow with the bank over the years. But the thinking of today's youngsters has changed. Earlier, if you ask any of the senior bankers how many banks or how many institutions they have worked in the last 20 or 30 years. They would maximum say 2 or 3 institutions. I worked in this bank, then that bank, and now I have been here in this institution for the last 10 years or 15 years like that. But it is not so with today's youngsters. Today's youngsters are thinking differently. With so many opportunities, especially coming up from the fintech sector, from the NBFC sector. This is a very impatient generation and there is nothing wrong with it. But it is for each bank to build up its own core team because there has to be something called the organisational culture.

I have come across many executives who proudly say that I worked in that particular bank for 15 years or 20 years. Now that is something which will add to their credentials and to the CV. The RBI has always looked at attrition rate in various banks. Now we are looking at it very closely because we find that the times have changed, and banks also need to give greater focus on this rate of attrition. It is for the banks to analyse and deal with it. The counter view somebody pointed out to me is that so be it. If the attrition is high, let that be a churning, why bother? So, there also we have not prescribed any norms or standards. We have just left it to the bank management. We feel your attrition rate is high, it is for you to do, whatever you want to do because ultimately it will tell upon your organisational culture, building up a core team over a period of time.

Tamal Bandyopadhyay:

Thank you Governor. If you are enjoying this candid conversation, give him a big hand. Time flies Sir. We have used 40 minutes and still, I have a few things left. We can continue a little bit Sir, with your permission. Those bankers who have told me to ask these questions, I will not name anybody, I have asked on your behalf. Governor answered. If you are here, you have heard him. So, that is it! Beyond that, I do not want to say anything.

Sir, the new investment norms that you recently circulated among the banks at full and final. I am not getting into the nitty-gritty. But from April 2024, you have said that banks can have the entire government bond portfolio in the HTM category. It is a fact that it is in sync with international standards, but the Reserve Bank of India's approach was actually very different. You have been raising it and reducing it, like it was 18%, you pushed it up to 25% then brought it down to 19.5%. During COVID time you brought it up to 23% and now the plan had to bring it down in phases. Instead of bringing it down, you have said no as much as possible you can keep it under HTM, which means 100% of my bond portfolio can be in HTM. Now, very sneaky feeling that will it prompt lazy banking? If I am a banker, why should I try to get auto loan and home loans etc. if I am getting good money in Government bonds, I will just sit on it for 10 years, 20 years, 30 years. I do not need to do anything.

Shaktikanta Das:

You said lazy banking. On the contrary, it will lead to active banking. I will tell you why. Today, about 70% of the investments made by the banks are held in HTM category and it is coming down as the banks have to sanction more loans. So, 70% is investments. So, obviously, it is putting pressure on the lendable resources available to the banks. The SLR holding of the banks for the last several years has been well above the SLR minimum requirement. Now in recent months, as credit offtake has picked up, the banks have slowly reduced their SLR levels, wherever they had excess SLR.

Now, from the point of view of stability or safety or security of a bank, we already have the LCR (liquidity coverage ratio). There is an LCR requirement which the banks are adhering to, the banks are supposed to keep 30 days of liquidity in a stressed situation. We also have in parallel what you call the SLR requirement which they are all required to maintain, and they are maintaining. We also have the CRR (cash reserve ratio) requirement which the banks maintain. So, from the point of view of safety of the bank, these are already requirements. You asked why we have removed the cap from HTM? Even if we remove the cap, it is not going to become zero. There will be still HTM because you have SLR, and these have to be high quality. These have to be what we call HQLA (high quality liquid assets) for SLR, LCR and for CRR of course it is cash. So, what is now happening is that as things stand today, the HTM holding of the banks, the fair value is not determined and is not disseminated.

In the last financial stability report, we have done the mark-to-market exercise, and valuation of the HTM holding of the banks and we have shown exactly that even if you do that valuation, still the balance sheet of the banks continues to be quite healthy. Now it is a requirement that the HTM holding, the banks will have to do their own internal risk management, interest rate risk management. They have also to do the mark-to-market valuations, the fair market value they have to arrive at, and they have to give it out. That means it will come as a part of their balance sheet or in their quarterly audited results. The auditor would be required to say that the HTM portfolio of the bank is based on mark to market, this is the plus, or this is the minus. This is the appreciation, or this is the depreciation. If there is a haircut, how much has been the haircut? So, we have made the system more transparent.

I would like to summarise and say that it will not lead to lazy banking. We are moving along with the international norms and if anything, it brings greater transparency to the HTM portfolio of the banks because the mark-to-market valuations will have to be done and will have to be published and the banks, internally, will have to do their interest rate risk management.

Tamal Bandyopadhyay:

This disclosure also rules out any possibility of having a Silicon Valley Bank here, right?

Shaktikanta Das:

Yes.

Tamal Bandyopadhyay:

One question is on the NBFC segment. For quite some time, you have shifted to, the rule-based regulation to NBFCs and you have identified the upper class, the top-end NBFCs which are treated almost on a par with the banks including the LCR requirement and all. So, if I am running an NBFC and I have a large NBFC, what would be your advice? I can clearly feel as an outside observer that you want to kill the arbitrage opportunities that exist, but now is it the RBI's way of persuading the large NBFCs that better to become a bank because I am not been allowed to take public deposits, the way the banks are taking, but you are subjecting me to everything, not SLRs here, but even LCR, NPA norms, SMA-1, SMA-2 everything what is bank subjected to whereas my cost of fund is far higher than banks.

Shaktikanta Das:

The norms for the upper layer are stricter than the middle layer, etc., because of the size and complexity. We have explained why we have gone for this scale-based regulation because of the size and complexity of the large NBFCs. Some of the NBFCs have a balance sheet size, which is much larger than a mid-size scheduled commercial bank. So, in the interest of overall financial stability, this was something which had to be done and we have done it.

Now, regarding the entry limit, you said that they are almost similar, but it is not. So, there are fundamental differences. The entry limit in a bank, a new applicant will have to provide ₹1,000 crore of equity capital he has to bring in, whereas for an NBFC for registration, it is still ₹10 crore. You may become an upper layer, so it is still ₹10 crore. Then you have other requirements like CRR, etc., which is a big difference between the NBFCs and the banks. NBFCs have no such requirement. So, there are lots of differences and the whole NBFC sector also enjoys a certain flexibility with regard to lending.

The banks are expected to have board-approved policies for sectoral caps, which is a requirement mandated by the Reserve Bank, whereas for the NBFCs we have not done it. But many larger NBFCs are doing it themselves by way of prudent management. So, there are fundamental differences between NBFCs and the banks. NBFCs enjoy greater flexibility. We have now also enabled co-lending between the banks and the NBFCs.

For the priority sector, we have also enabled the banks to provide lending through the NBFCs. That window has been given. There is some narrative being built up that the bank lending to the NBFCs is going up and it can be a risk factor, etc. Let me say very clearly in this BFSI event that all these numbers, banks’ exposure to NBFCs at the system level as well as at the individual banks level, and far more granular details are monitored by the Reserve Bank regularly and much more intensively than anyone can imagine.

It would not be correct to say that we are nudging Upper Layer NBFCs to come as banks but it is always open to any Upper Layer NBFC or anyone for that matter to apply for a banking license because it is on tap. Anybody can apply at any point in time. Of course, it has to satisfy our fit and proper guidelines and other requirements.

Tamal Bandyopadhyay:

Thank you Governor. You can not be more explicit than in this. I will not ask you about inflation and interest rate cycle, etc. We discussed it thoroughly in yesterday's economists panel. There were six of the best economists of India present. So, there are questions from the audience when the rate cycle changes, I will not ask you because you will not give the answer. So, I am not going to ask you.

You have been repeatedly saying that your focus is Arjuna’s way of looking at 4% inflation on a durable basis and not 6%. So, it is a great commitment one can have from the Reserve Bank of India Governor because at some point of time, there were discussions that we shifted it from 4% to 6%. But you made it very explicit that whatever needs to be done, you are stuck to 4% and everything else that you have done is aiming for that.

My very simple question is – there are a lot of uncertainties, the geopolitics, the two regions; I am not repeating everything else, the spread between Indian Papers and the US Papers shrinking by the day. You spoke about OMO through an auction. You have done some screen-based OMOs in the recent past. Our currency is doing pretty well compared to most other currencies, but if the FDI outflow if it continues, there could be pressure on the currency. With all these things put together, can you have an independent monetary policy? Is India decoupled or there could be a situation like that you need to take a different approach?

Shaktikanta Das:

I will come to the question. But before that, I would like to place a few facts. There have been outflows from the equity segment. But all the outflows that have happened over the last two months are preceded by heavy inflows. There were very strong inflows in the Indian market in July and August. It was only in the September and October that there have been outflows. There have been equity-related outflows also. But, I want to set the record straight, the outflows are not entirely because of equity-related.

The equity-related as a percentage of the total outflow is much less. Outflows are mainly related to the import payments. Payments for imports, it has been repayment of earlier ECB loans. So, there are several other components. It is not as if the entire outflow is because of FPI outflow. That is one record I want to put it straight. Now our monetary policy, you mentioned the difference in the bond yields between us and the advanced country, the US. We look at all possible international factors because we are living in a globalised world. We will be impacted by what is happening all around us.

But ultimately and eventually, our monetary policy is primarily determined by domestic factors. By domestic factors, I mean what is the inflation growth outlook that we have? What is our anticipation with regard to the inflation trajectory and growth trajectory as provided in the RBI Act? So, it is the domestic factors in terms of the future dynamics of inflation and Growth dynamics, which primarily are the principal determinants of our monetary policy. Our monetary policy is not influenced by what is the differential in bond yields or if the currency is depreciating.

Many countries do interest rate hikes to manage the pressure on their currencies. Recently, Indonesia probably did it. There are other countries in our region, who do it from time to time. Singapore has a monetary policy framework where they do not have inflation as a target, they have a band for exchange rate as the principal target. So, we look at international factors, we take them into consideration because we are living in a globalised world. We are impacted by all that is happening around us.

But ultimately and eventually our monetary policy is dependent on growth and inflation; what you call inflation and growth. Otherwise, some of your friends may ask why the Governor said first growth and then inflation. So, it means the RBI is changing priority. No, let me say that we look at the inflation growth dynamics, the first priority is inflation at the moment and based on that we decide on policy.

Tamal Bandyopadhyay:

Thank you Governor. There are not too many governors we have seen who can communicate so well Sir. We have almost finished time available, but just two more questions. Your capability of convincing us is so strong, with your permission, I must tell the audience one small anecdote. This happened a few years back, just before COVID. Sir just took over as Governor. There was a book launch of Dr. Y. V. Reddy and another Reddy, I am forgetting his first name jointly written. The RBI Governor Mr. Das, few months old in office, came to launch the book at Y. B. Chavan Auditorium and after the launch, Dr. Reddy was talking about various people, bureaucrats and governors and all. There are bureaucrats who will call you to your room and say that whatever the proposal is great and flatter you and still you come out of that room, not very happy. There are governors who would say I am afraid I cannot accept your proposal, but the way he would say and explain that you would come out of the room extremely happy, and you will never criticise the Governor again. He did not name but he pointed a finger at Das Sir. Do you remember that? So, that is the power of communication. We are just coming to almost end and all this.

You have been repeatedly saying that India is the global growth engine. Just for academics, we are a few months away from general elections, state elections are also coming up. This is the geopolitics. This is the currency. This is the money outflow, inflow, whatever it is. So, are there any concerns at the academic level which can derail the growth engine?

Shaktikanta Das:

So far as growth is concerned, let me say that the growth momentum in India continues to be what it was. In other words, the growth momentum continues to be strong. The second quarter GDP number, which will come at the end of November, will surprise. I must qualify because numbers tell for themselves when the numbers are released. But looking at the momentum of economic activity, looking at a few early data points which have come in a few early indicators, I can say that the second quarter GDP number as and when it is released at the end of November, in all probability will surprise everyone on the upside. Let me say that. We have said in the RBI, just check it up the second quarter we have said 6.4%.

Tamal Bandyopadhyay:

6.5 is the average.

Shaktikanta Das:

6.5% is annual, but in the second quarter it is 6.4%, please check-up. Yes, it is likely to surprise on the upside, but that is likely to happen. With regard to the concerns, the biggest challenge to every country, not just India, is the evolving geopolitics and its fallout on financial markets and global growth. New flashpoints are developing, new geopolitical conflict points are developing. So, how the international geopolitical conflicts are going to play out, whether there are new flashpoints coming up!

So, geopolitics today poses the biggest risk for growth, not just for India, but for the world as a whole. We saw it after the Ukraine war, it immediately led to financial market volatility. It also to some extent pulled down global growth. So, it is the geopolitical uncertainty which I think is the biggest risk to global growth. But, so far as India is concerned, even with all geopolitical risks, I can say with confidence that India is better placed compared to other countries to deal with such potentially risky situations, we are better placed.

Tamal Bandyopadhyay:

Thank you Governor. Thank you for exuding confidence. We trust you and we feel very reassured because the way you handle COVID; your unique way of raising interest rates in quick succession then staying put there and your reaffirmation of inflation targeting at 4%. Everything is so reassuring, and we are happy and fortunate to have you at the Central Bank in India.

750-800 odd people sitting here and there are thousands of people watching you. There are bankers, non-bankers, and insurancers. Everybody is the miniature of the Indian financial sector. What would be your final message to them? If you want to say anything.

Before that with your permission, one personal question, people ask me particularly from overseas who join you for discussion, etc. They are very intrigued. Your passion for ties. They said have you seen the Governor’s ties? They try to gauge the enormity of the situation, etc., by the colour of your tie, like if you are happy, you would prefer one colour; if you are not so happy you prefer another colour. Your tie is a mystery. Your love for cricket everybody knows. They try to decipher that by looking at your tie’s colour, whether you are going to for a rate hike or status quo, they want to gauge. So, can you tell us a little bit about this and then the final message?

Shaktikanta Das:

I would be curious to know what interpretation they derive from the various colours of my tie. I would be curious to know. Let me say that I do not know if ever I would write a book of memoirs or something. I have never thought about it. I do not take notes or anything to keep them for writing a book. I have never thought about it. But if ever I decide to write a book, you have given me some clue that this could be one of the sub chapters about the colour of the tie. After my tenure in the RBI is over, I perhaps can give a lecture or a speech somewhere about monetary policy and the colour of the tie.

Tamal Bandyopadhyay:

Your message to the financial system as you can see is a miniature Indian financial system sitting here.

Shaktikanta Das:

I have been talking about it extensively, again and again. I have talked about risk management. I talked about governance, but since you are asking and we are in a World Cup season, let me just say, the message is to all financial sector players and stakeholders please play long term, play like Rahul Dravid.

Tamal Bandyopadhyay:

I rework my initial sentence where I said that he is the Central Bank of the world, and he has got all the recognition this year and this is a kind of test match, and he is the captain. He is not the captain; he is actually the coach. So, with that note, I would request you to give a standing ovation to Mr. Das, the RBI Governor for an outstanding talk. It cannot be more candid and more forthcoming than this, Sir.