The
policy was on the expected lines, but the tone of the Reserve Bank was a
bit diffident on the fast growth prospects of the economy.
Based
on the parameters, that is suppressed inflationary pressures, sluggish
growth in GDP, worsening balance of payment situation particularly the
current account deficit, liquidity constraints in the economy which have
not shown any encouraging signs of improvement, the Reserve Bank just
reduced the repo rate by 25 basis points from 7.5 per cent to 7.25 per
cent.
Consequent to this change, the reverse repo
rate and the Marginal Standing Facility would remain at 6.25 per cent
and 8.25 per cent respectively.
The effectiveness of
monetary policy depends on its transmission, through the banks, which
however has been proving to be ineffective of late.
The
policy measures, particularly the reduction of CRR and repo rate
effected since 2010, did not translate into reduction of lending rate to
customers except perhaps for a very marginal adjustment of less than
0.5 per cent to a segment of borrowers.
Even in
respect of the latest reduction of 0.25 per cent in repo rate, the
bankers have expressed their inability to pass on the benefit to
customers.
Over a period, the banks have become
greedy and changed their business profile keeping an eye on
profitability ignoring the deposit customers and the borrowers engaged
in physical production of goods and infrastructure.
They
keep an eye on retail and well-off customers and encourage auto loans,
housing loans and other consumption loans which were in the non-priority
list in the olden days.
Banks’ tendency to maintain
NIM at around 3.5 per cent has been persisting despite the Governor’s
exhortation to reduce it to a reasonable level and this coupled with
ease of doing business more with borrowed funds than mobilised deposits
has been forcing the banks to keep away from productive loans.
The
problem of non-performing loans adds to the banks aversion to venture
into risky loans and given an opportunity they avoid credit risk by
escaping manufacturing loans. The human resources of the banks have also
not been attuned to go into productive loans with adequate training on
appraisal, follow-up and supervision of loans.
Making life easy has been the broader philosophy and monetary policy
transmission is having a very low priority in the name of risk
management and maximisation of profit, is what is seen to be in
practice.
While apprehending on the inability to
ease monetary policy given the poor economic scenario, the Governor in
his guidance note for the period 2013-14, has, however, cautioned that
“the monetary policy action by itself cannot revive growth and it needs
to be supplemented by efforts towards easing the supply bottlenecks,
improving governance and stepping up public investment alongside
continuing commitments to fiscal consolidation”.
This
is an explicit message to the Government that the RBI has its own
limitations to give a boost to the economy which has been showing
sluggishness thanks to policy paralysis, governance standards and
dwindling confidence in the system.
This policy
statement implicitly indicates that a lot remains too be done by the
Government to put back the economy on growth trajectory.
The
highlight of this year’s policy is that the Reserve Bank has brought in
a regulatory measure in respect of unhedged portion of the foreign
currency exposure of corporates which has been long overdue.
This
will have some impact on banks profitability and capital adequacy
areas, but it will certainly help to improve the health of the
corporates and forex market in the long run.
The
overall message one can infer from this policy is that RBI can think of
easing monetary policy further only if inflation is brought under
threshold level and other requirements which basically come under the
domain of the Government to give a thrust to the growth of the economy
are in place.
A genuine concern well brought out.
Dr.T.V.Gopalakrishnan
Keywords: RBI, monetary policy, suppressed inflationary pressures, sluggish growth in GDP, worsening balance of payment, current account deficit, economy
This article is published in Business Line dated 13/5/13)
This article is published in Business Line dated 13/5/13)
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