RBI must understand broader mandate, says Chidambaram

Decision on FDI cap in third week of July

 In a veiled message to the Reserve Bank of India (RBI), Finance Minister P Chidambaram has hinted that it should not focus solely on containing inflation but also look at the larger mandate of growth and creation of jobs.

Ahead of his meeting with PSU bank chiefs tomorrow, he also said banks would have to be heard before advising them on taking a balanced view about passing on the benefit of rate cuts to consumers.

“The RBI must understand its mandate in a broader sense. Yes, RBI’s mandate is price stability, containing inflation and maintaining fiscal stability but that must be understood as part of a larger mandate of growth and creation of jobs,” he said.

He was replying to a question on what he expected from the RBI in the next policy review scheduled on July 30.

On at least a couple of occasions, Chidambaram had not hidden his unhappiness over the hawkish stance adopted by RBI Governor D Subbarao over meagre interest rate cuts.

“I think all central bankers talk in very ambiguous terms but this I think there is nothing wrong in the statement,” Chidambaram said in reply to a question on the recent statement by Fed Chief Ben Bernanke which had led to spooking of markets across emerging economies.

To a question on banks not passing on rate cut benefits to borrowers, Chidambaram said, “We must also hear the side of the bankers. While the case of the consumers, the borrowers is a very strong case, for the bankers also they put a equally strong case.
“It is after hearing them then the government would have to advise the public sector banks to take a balanced view”.

Chidambaram will meet heads of public sector banks tomorrow to review financial performance of lenders and discuss ways to step up lending activity to boost sagging growth, besides passing on the rate cut benefit to borrowers.

"The bankers have also got a case. Provisioning norms have been tightened, capital adequacy norms (they) have to meet Basel III norms in a period of four or five years. Banks also need to have higher profitability," he said.

To prop up growth, the RBI has reduced the policy rates by 1.25 per cent since January 2012.

However, because of liquidity constraints banks have lowered the lending rates by only 0.30 per cent during the period.The agenda for the meeting of the Finance Minister with the bankers would also include direct benefit transfer, deteriorating asset quality and credit growth.

The Finance Minister would also discuss issues relating to the recovery of bad loans, restructuring of loans and recent RBI guidelines pertaining to it. Non-performing assets (NPAs) of banks have been on the rise for past several months due to slowdown in the economy. The gross NPAs of some public sector banks, including State Bank of India and Punjab National Bank have crossed 4 per cent of the total assets at the end of March, 2013.

Decision on FDI cap

Seeking to spur foreign investments, Finance Minister P Chidambaram has said the Union Cabinet will decide on raising FDI caps in different sectors in the third week of this month.
The Department of Industrial Policy and Promotion (DIPP) is holding consultations with different ministries on the suggestion of the Finance Ministry which, has proposed sweeping changes in FDI regime in sectors like defence, telecom and multi-brand retail.
“The DIPP is calling each ministry and asking for its views in writing. They have told me that they will bring a paper to Cabinet. Hopefully in the second week, it will be sent to the Cabinet and then we should be able to take a decision in the third week,” Chidambaram said.

Virtually doing away with the 26 per cent ceiling, a committee headed by Economic Affairs Secretary Arvind Mayaram recommended that FDI limit be raised to 49 per cent in almost all sectors through automatic route.