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October 30, 2002
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The Rediff Interview/ Bimal Jalan, Governor, Reserve Bank of India

'No one will invest just because rates are low'

Reserve Bank of India Governor Bimal Jalan's greatest worry at the moment is not the state of the fiscal but the lack of investment demand. He knows well that low interest rates alone will not push up investment demand.

In a wide-ranging interview with Business Standard, Jalan said he supported the bailouts of weak banks and financial institutions and that a concessional package for the Industrial Development Bank of India is under the central banks consideration. Excerpts:

What is the credit policy trying to do?

We are trying to stabilise expectations and the objective circumstances are highly flexible for anyone who wants to invest. But it's true that nobody will invest only because the interest rates are highly favourable.

Then why have you cut the bank rate, repo rate and the cash reserve ratio?

To take advantage of the present relatively good environment. From the monetary and inflation point of view, we want to say the RBI feels that interest rates are going to move south despite the drought. And the objective is to ensure that ample liquidity conditions continue.

What do you expect from these cuts?

A continuation of the present situation and an assurance that the liquidity situation and the interest rate environment remain soft.

How do you expect the economy to respond?

All things remaining the same..... positively.

What is your greatest concern at the moment? Is it the state of the fisc?

No. The fisc is a concern in the medium term, say, four or five years. If you ask me what the immediate concern is, it is the lack of investment demand.

Are you less pessimistic now than, say, a few months ago? The RBI Annual Report in August gives a distinct feeling that you can't do anything.

No, I didn't say all that. The Annual Report expresses a certain view. You see, growth is certain but there are a lot of players (in the system). They have to take a view of future prospects. There is the public sector, there is the consumer ... what he is looking at from the economy. We don't see much of a problem on the inflation front, the monetary front and on the interest rate front.

Whatever is within your domain is looking good. How do you mesh this reality with the real and the fiscal sides?

The only way to do so is to recognise that there is a deficiency of investment. We must proceed on that at a faster speed than what we see today. Only then will there be greater confidence about the economy's prospects.

Why haven't you cut the rates more steeply?

If you go for big cuts of 3-4 percentage points, the banks can succumb. There can be a financial crisis. Cuts will have an effect on their liabilities and assets. If you force the banks to bring down the prime lending rates to 7-8 per cent, all banks will start making losses. The system will then suffer.

Do you then rule out the big bang option?

That kind of a thing can be extremely injurious to the financial system and financial stability if there are real structural problems at the root, which there are.

Do you support the bailouts of the Industrial Development Bank of India, IFCI, the Unit Trust of India and other banks and financial institutions?

Yes, I support them. Otherwise, you will lose confidence in the system. I wont call them bailouts. The government has to support these institutions. And it is not doing it blindly. It has split the UTI into two. That is part of restructuring.

What about IDBI? Would you excuse IDBI from the statutory liquidity ratio and cash reserve ratio commitments on its way to becoming a bank while ICICI was subjected to these requirements?

If the government gives the guarantee, we may consider it. After all, what is SLR? Investment in government paper.

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