Part I: 'My departure was not thrust upon me'

Reserve Bank of India Governor Bimal Jalan, who will step down on September 6 and hand over charge to Y V Reddy, does not admit that the central bank is targeting both interest rates as well as exchange rates.

The Reserve Bank's act of dollar buying and keeping the repo rate at an artificially higher level till recently, according to him, is nothing but use of economic policy tools to meet particular goals at a particular point of time.

In the concluding of the interview with Tamal Bandyopadhyay, Jalan talks about market realities like fall of gilt yields and the importance of creating investment fluctuation reserves by banks.

Extracts:

Let's talk about the value of the rupee. You are buying dollars but the appreciation of the rupee is harming Indian exporters. In contrast, exporters in China have an advantage as the Chinese currency is pegged to the dollar. How do you tackle this problem?

Please don't take a short term view. Don't link yourself to one country or one currency. If you look at it from the historical perspective, the rupee was depreciating when the Chinese currency was fixed.

You have been targeting both the rupee as well as interest rates. How long can you do that?

The RBI does not agree with a very simplified view on economic variables. We are not targeting anything. We are using economic policy tools to meet particular goals at a particular point of time. How do I convince you? We are keeping an eye on three dimensions of the Indian economy - growth, the monetary environment and the external environment.

There are different views. If we don't buy from the market, you'd say exporters are complaining. If we buy from the market, you'd say some free marketeers are complaining. If we buy and don't buy, you'd say we're targeting! We don't have a fixed exchange rate target but we want to make sure that exchange rate movements are orderly and not too volatile. I am sure there will be arguments about that also. That's a welcome debate.

You cut the repo rate last month by 50 basis points when the inflation rate was below 4 per cent. The RBI annual report predicted a 5-5.5 per cent inflation rate. Is there a case for raising the repo rate?

All these figures will be re-looked at, at the time of the October mid-term review of the credit policy.

Is there any scope for real interest rates going down?

It depends on which interest rate you are looking at. In terms of the real sector, the five-year and 10-year bond rates are low. If you are looking at the banks' lending rates, they are not so low. In our structure, we have different real interest rates in different segments of the market.

Can't rates converge?

Hopefully, over a period of time. There are structural constraints in the system...

You wanted to make the yield curve steep by cutting the repo rate. But the short term rate cut has also driven down the long term rates. The rates have come down across maturities and the curve still remains flat.

The flatness has reduced a little. We cut the repo rate keeping in view the good monsoons and the low inflation rate.

In the US, the overnight rate is 1 per cent and 10-year US Treasury yield is 4.5 per cent. In India, the overnight rate is 4.5 per cent and the 10-year bond yield is 5.25 per cent. Isn't the situation anomalous?

A few months ago, the overnight rate in the US was 1.25 per cent and ten-year Treasury rate 2.5 per cent or so. The differentials do vary from time to time.

The yield on US 10-year treasury has gone up since then.

Yes, it's gone up.

Isn't the RBI responsible for creating the bond bubble? If there is a reversal in trend, banks will be hurt terribly.

I would urge you to look at the overall economy and I would request you to take this view in totality: if interest rates are lower than what they used to be; if inflation rates are lower, foreign exchange reserves are high and exchange rates are stable, the country's prospects are good. I am not saying that every policy of ours is right, but overall things are good.

Do you see a bond bubble?

I don't see it as a bubble. The holder of any bond where the capital value is subject to fluctuation must take into account the risk of capital value fluctuating and provide for it.

The banks should also create investment fluctuation reserves. I don't see any problem here. Things can change but the banks must provide for them.

In the developed world, whenever there is a rate cut, the impact is felt.

Across all markets, including the stock markets. This is not the case in India. Why do you keep the markets compartmentalised? Scams take place when money spills over from the bond market to the equity market.

Can't you legalise it?

I don't have a view on this.

Since interest rates are very low, do you see retail investors shifting their asset preference from bank deposits to equities?

No comment. I have no view on this.

How long will FII inflows continue in the Indian stock markets?

As long as there is confidence.

On a personal note, tell us about your life beyond the Rajya Sabha from October?

I also propose to write a book. I have written a few books on the Indian economy. I will continue to reflect on Indian issues, both, in prospective and retrospective ways and perhaps write another book covering issues like economics, politics and ethics.

How would you like to be remembered? As the Alan Greenspan of the east?

No, not all. Just as me.

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