Excerpts from the interview:

It was the finance ministry, not the Reserve Bank, which first announced the decision to hike banks' capital adequacy ratio to 10 per cent.Subsequently, we have seen the finance ministry announcing a cut in export credit rates. Is the finance ministry calling the shots now, with the RBI becoming a mute spectator?

There is complete harmony between the finance ministry and the RBI. We have different areas of responsibilities, which is the case within the government too...

In our scheme of things, ultimately, it is the government which makes the economic policies and decides on the direction of the policies. The RBI fits into that framework under the kind of authority that has been vested in it by parliament or the government.

I don't see any tension ofthis kind, and it should not be viewed as who is making what announcement.

There may be a difference of view at the technical level...We would stress something from the monetary point of view, but the government would stress something else because it wants to take a different perspective. This may lead to some differences. But we have to work in consonance.

We have seen this debate emerging in Europe where the central bank is supposed to be independent and the political authority is independent...And tension is mounting between them as to what the fiscal and monetary sides should do.

Aren't there differences of opinion between the RBI and the finance ministry on the ideal level of rupee?

I don't see this. I think from the country's point of view, the RBI can only succeed if it has the complete support of the government. Our priorities and accountability to parliament are through the government. Make no mistake about that. There is an act which gives the RBI certain responsibility andauthority. But the responsibility to parliament is exercised through the ministry of finance.

Does that mean the latest policy was prepared by the ministry of finance?

No.

But aren't there differences of opinion between the RBI and the finance ministry?

Maybe in a couple of areas on which the RBI has a different view. Similarly, there may be some areas where the government may take a different view. However, such differences, whenever they arise, are resolved through discussions and consultation.

What are the issues on which you do not agree with the finance ministry?

I do not want to go into it. There have been a couple of areas on which we may have had a difference of opinion.

Is that on the issue of price stability?

No, no...On that we have no difference. On fiscal deficit, there is no difference of views. Even on keeping interest rates low there is no difference of views.

Is the difference of opinion, then, on the structural changes that the RBI hasproposed on the Narasimham committee recommendations?

Not even that. All the structural changes have been proposed in consultation with the government.

Are these changes irreversible? In the first phase of reforms, the RBI extended the deadline for attaining the eight per cent capital adequacy ratio thrice. Why, even the government had to pump in recapitalisation funds to help banks reach that level.

I do not see such a problem this time. The capital adequacy ratio does not run counter to the government's intention. Government is the owner (of banks), and the responsibility for capitalisation vests with the government unless the banks are allowed to tap the market fully. But that is a decision which will have to be taken by the government.

Shouldn't the government bring down its stake in state-run banks?

We have not taken a decision on this...We have noted the Narasimham Committee recommendations.

Are these structural changes announced in the credit policy for the second halfof 1998-99 sacrosanct? Will you stick to these even if the banking sector is not prepared for a tightening of prudential norms?

Nothing is irreversible. This is an honest statement about where the banking system should arrive by then (2000-2001). And it is in the constructive spirit that we hope that all the banks will respond. There may be one or two banks which may have special problems. These problems will have to be resolved.

Isn't there a difference of opinion on the implementation of the Vasudev Committee report on NBFCs?

The Reserve Bank was closely associated with the report. From day one, when these regulations were put in place, we said we wanted suggestions. We want the NBFC sector to be brought under some discipline, but at the same time we want it to grow.

The committee was set up after consultation with the RBI. Many of these changes could require legislative amendments, regulatory alterations...We have to work together. Some of the inputs that the RBI has put in have beenaccepted by the task force. We had set up an advisory group on NBFCs. Certain suggestions received from the group were passed on to the task force.

Your credit-policy document spoke about your dilemma. It seems that you are unable to take a view against the backdrop of the macro-economic gloom...Doesn't it send out a wrong signal?

This is a wrong reading (of the policy document). You always have two options which could be equally valid. The options are tightening of interest rates or leaving them as they are. That's the dilemma.

You seem to be uncomfortable with the fiscal deficit.

That is not true only of the RBI; it is equally true of the government. As far as I can see, anybody who has looked at the macro-economic figures is entirely of the same view. It is only a question as to how it (the fiscal correction) is to be done.

How can it be done?

There has to be a collective decision on the part of the country that we have to deal with the deficit.

What can the RBI doabout it?

It is not for the RBI to decide. It is for the government to decide, and ultimately it has to take a decision.

You have hinted at rising interest rates in the document.

No, we have not dropped any hint to that extent. What one has said is that the market's ability to absorb large amounts of government paper year after year is limited. There is no difference of opinion on this. The market is saying this; it is not something we want.

Senior bankers feel the NPA figures are understated and insist that what we are seeing is the just tip of the iceberg. For instance, the first-half results of banks and institutions have shown that bad-loan levels have risen.

This is not true. I want to make two points. The NPA figures are as per norms laid down by the RBI, and these are subject to regular inspections. There is no significant difference between the RBI's assessment of NPAs and the assessments made by the auditors of banks. Over a period of time, the quality of assets has notdeteriorated.

Most of the results have shown higher NPAs in the first half.

There are cyclical problems. NPAs would decrease within the cycle...If certain industries are affected badly, then we would see the NPAs increase. Banks will have to make provisions for these as per rules. But it does not show that over a medium term a trend (of higher NPAs) is emerging.The bad-loan level should be seen in relation to the total assets of the banking system, including investments in commercial paper and other instruments-not only in relation to advances.