January 29, 2012:
Kudos to the Reserve Bank for having come out with a bold measure of releasing liquidity to the funds-starved market through reduction of CRR by 50 basis points from 6.0 per cent to 5.5 per cent.

This measure alone should help the banking system take care of partially the gaps in the credit needs of the manufacturing sector to augment investment and production, although the cost of funds is comparatively higher as policy rates have not been changed.

The Reserve Bank is fully justified in keeping the repo rate and reverse repo rate unchanged in the background of persisting high level of headline inflation which averaged at 9.7 per cent (y-o-y) during April-October 2011 and ever increasing fiscal deficit expected to be far more than the budgeted figure of 4.6 per cent.

Thus, the repo rate and the reverse repo rate will continue to be at 8.5 per cent and 7.5 per cent respectively. This has been done perhaps keeping in view the RBI's continued apprehension, and justifiably so, in containing the inflation and inflation expectations.

Comfort to liquidity
The relaxation in CRR is to provide comfort to the liquidity constraints, of late, faced by the banking system. The borrowings of banks from the Reserve Bank have been exceeding the limits and often much higher than the RBI's comfort level of Rs 60,000 crore.

These borrowings add to the cost of funds whereas banks do not get any return on their cash reserves kept with Reserve Bank out of their costly deposits. The reduction in CRR is expected to release funds to the tune of Rs 32,000 crore and this can be used to expand the credit particularly to the manufacturing sector. This should also help the banks to reduce the rate of interest to the borrowers to the extent they save on their borrowings from the Reserve Bank.

The banks got partially what they want but they also have got a lot to do in the economy taking into account the fiscal, monetary and economic conditions of the country. They have a major role to play to make inclusive growth a reality by taking advantage of financial and banking inclusion through innovative methods as a great business opportunity.

Improved offerings
The potential to increase deposits is manifold and the tendency of people to go in for other types of investments, particularly in gold and real estate, needs to be curbed by offering improved savings products. The NIM continues to be high in banks and this needs to be checked and brought down by improving the credit portfolio and recycling of funds.

The Asset-Liability management needs fining and cost of funds need to be brought down further. The Reserve Bank has been liberal with the banks by deregulating the SB NRI deposits rates and permitting them to restructure the sticky loans to improve their competitiveness and project a better balance-sheet.

The Reserve Bank has, however, moderated the GDP growth at 7 per cent as against 7.6 per cent projected earlier in its October 2011 review of credit policy. Considering, the external and domestic factors, even the 7 per cent growth is good enough to keep the confidence level high and to better the performance further in the next fiscal.

The need of the hour is the development of infrastructure which impedes the growth of the economy. Making available quality coal at reasonable price to the power sector through all possible means i.e. by rail and road will itself go a long way to give a boost to the economic growth.

The ease of doing business by removing administrative and legal bottlenecks, facilitating FDI investments in infrastructural developments, improving productivity both in agricultural and industrial areas without too much of interference by the Government and bringing in efficiency in the marketing and distribution of products, particularly agricultural products, need urgent attention which only the Government can provide. There is also an imperative need to activate and coordinate all rural development related agencies to give a facelift to the rural economy which requires more freedom for State Governments to take initiative.

Now, it is the turn of the Central Government to do its bit to contain fiscal deficit, improve supply constraints and provide the much needed infrastructure to give a boost to GDP growth and bring down inflation.

On the fiscal front, the Reserve Bank has made its message explicitly clear to the Government by saying that “considering the egregious implications of large fiscal deficits, which are well known , there is an urgent need for decisive fiscal consolidation, which will shift the balance of aggregate demand from public to private, and from consumption to capital formation. This is critical to yielding the space required for lowering rates without the imminent risk of resurgent inflation. The fourth coming Union Budget must exploit the opportunity to begin this process in a credible and sustainable way.”

Hope the Government does its part fast and the economy will flourish.

Dr.T.V.Gopalakrishnan

(This article appeared in The Hindu-Business Line dt29/01/12).