Participants from RBI:
Dr. Raghuram G. Rajan – Governor
Shri H.R.Khan – Deputy Governor
Dr. Urjit R. Patel – Deputy Governor
Shri R. Gandhi – Deputy Governor
Shri S.S. Mundra – Deputy Governor
Dr. Michael D. Patra –Executive Director

Moderator: Ms. Alpana Killawala – Principal Chief General Manager

Thank you Alpana. Since our last review the bulk of our conditions for cutting interest rates have been met. The January 2016 target of 6% inflation is likely to be achieved. Therefore the focus should now shift to bringing inflation to around 5% by the end of fiscal 2016-17. With weakening global activities since our last review, commodity prices will remain contained for a while. With low industrial capacity utilization, more domestic demand is needed to substitute the weakening global demand so that the domestic investment cycle picks up.

The coming Pay Commission Report could add substantial fiscal stimulus to domestic demand, but the Government has reaffirmed its desire to respect its fiscal targets and improve the quality of its spending.

Under these circumstances the Reserve Bank intends to be accommodative to the extent possible given its inflation goals while recognising that continuing government policy implementation, structural reforms and corporate actions leading to higher productivity will be the primary impetus for sustainable growth.

Now, we do believe that investments as well as durable goods purchases are likely to respond more strongly if there is more certainty about the extent of monetary stimulus in the pipeline even if transmission is slow. Therefore the Reserve Bank has frontloaded policy action by a reduction in the policy rate by 50 basis points. Given our year ahead projections of inflation, this ensures that one year expected treasury bill real interest rates of about 1.5% to 2% which we think is appropriate for this stage of the recovery.

While the Reserve Bank’s stance would continue to be accommodative, the focus of monetary action for the near-term will shift to working with the Government to ensure that impediments to banks passing on the bulk of the cumulative 125 basis points cut in the policy rate are removed. This includes, amongst other things, reviewing small savings rates. The Reserve Bank will continue to be vigilant for signs that monetary policy adjustments are needed to keep the economy on the target disinflationary path.

Now we have laid out a number of other policies today. We have a medium-term framework for foreign portfolio investment in the Government Bonds with a target of allowing FPI ownership of up to 5% by March 2018. We will also open FPI investment in the State Government Bonds with a target of 2% by March 2018. Now altogether this implies incremental space about $25 billion to $30 billion over the next 2.5 years of which $5 billion will open up immediately over the next six months. The intent here is to create more room steadily to slant towards long-term investors and to help develop domestic markets.

We have also open to “Masala Bonds”, I think that is the name they are called by, these are rupee bonds and we intend them to have a minimum maturity of five years; they can be issued abroad or they will be issued abroad. For the moment they will come under the overall corporate FPI limit. We will bring down the ceiling on SLR securities held under HTM from 22% to 21.5% with effect from the fortnight beginning January 9, 2016. Thereafter, the SLR and HTM ceiling will be brought down by 0.25% every quarter till March 31st, 2017.

Now we have announced increased participation by a variety of players in various markets in our ongoing efforts to improve participation and market depth. We will increase the limit for resident entities for hedging their foreign exchange exposures in the OTC market from US$ 250,000 to US$ one million without the production of any underlying documents subject to the submission of a simple declaration. We are also going to examine the possibility of participation by financially sophisticated investors up to certain limits in currency markets without underlying exposure.

Let me conclude these opening remarks. The global environment is looking weak for a variety of reasons. Undoubtedly this is not good news for India because no country is an island. But there is opportunity in even the worse news; we can stand out as a country which still promises strong, sustainable growth. The possibility of realising this opportunity should encourage us to re-double our efforts, to implement our past announcements and to undertake new reforms. The economy has legacy problems to deal with and there are no silver bullets as I have said repeatedly. The Government, other regulators and the RBI are turning around this economy through hard work, through pragmatic policies that are not ideological but based on what works. At the same time if we are to avoid the mistakes of the past, policy goals have to be steady and predictable so that everyone knows where we are going and can make long-term investments accordingly.

I hope these remarks help you understand the policies we have announced today. Thank you.

So note very carefully, we said predictability about goals, of course if you can also introduce predictability about what we do every time that would be a good thing. I think most people expected a rate cut, nobody expected a pause; that was good. Now the extent of the rate cut, to some extent, we were influenced by international development since last time which suggested a much weaker external environment. If you look at our exports, for the first time volumes also were a little weaker this time around, all of which suggests that we have to live in turbulent waters for a little while longer. So that was why the policy was a little different from what people expected. Going forward, I mean again we will try and ensure that people understand what we are trying to do and we make judgments on what we need to do to get there based on all the data before us, as well as some of the actions we can take. So I think I cannot tell you exactly what policy will be every time, but I hope to give you a sense of what it might be as well as once we do it even understanding of why we did it, which is reasonable.

On Glencore itself, I doubt that there is a significant risk stemming from them. Of course which way will it go, typically with large commodity traders having difficulties, I would guess the primary factor would be to depress commodity prices even more. One could argue the other way that given that there are intermediaries in the process it could elevate some commodity prices. Nevertheless I think it is one company amongst many companies that do similar activities and the fact they are in distress does not mean they stop functioning. So I do not think we worry too much about the effects of Glencore.