RBI prefers to be cautious, neither conservative nor aggressive.

RBI prefers to be cautious, neither conservative nor aggressive.

RBI’s latest policy signals caution and sounds a bit diffident on the economic recovery. RBI has reduced the GDP growth forecast from 7.8% to 7.6 % for 2015-16 and enhanced the inflation expectation to 6%.  However, to be fair to the Government and the market, RBI decided to reduce the REPO rate by a quarter percentage   and   gave a psychological boost to the sentiments all around though there are uncertainties and risks to have a very sustainable and favorable economic environment. The uncertainties highlighted are the IMD’s prediction of a below-normal southwest monsoon. needing   an   astute food management  to mitigate possible inflationary effects,  firming up of crude prices seen amidst considerable volatility and  presence of geo-political risks  and  uncertainty  in the external  economic environment  having impact on  inflation.

What the economy needs now is investments supported by active demand and consumption which is definitely not under RBI’s purview. Credit is only a contributory factor and credit alone cannot create the atmosphere needed to attract investments. The fiscal and administrative policies of the Government, strong institutions and widespread acceptance of the policies for effective and speedy implementation are needed to attract investments from all over. The mood of the country has changed and   the expectations are very high, but there are several bottlenecks and the implementation of policies and good intentions of the Government   do not unfortunately get easily translated into action   is a reality and the old mindset to drag and tinker with policies and their implementation continue to prevail not allowing the economy to move forward.        

This is visible even in Banking. In fact this is for the third time RBI cut the rate since January and the transmission of the earlier two cuts effected in quick succession in Jan March quarter has not been felt in the market and banks by and large continued  to remain   even insensitive to the advice to pass on the benefits to the borrowers. Not only did the banks fail to cut the interest rate on advances but they have also failed to contain the growth of non performing loans. The banks effected cuts in their deposit rates and managed to post a good net Interest Margin for the year end. The failure on the part of banks to pass on the benefit of rate cuts is something which needs to be thoroughly investigated. Banks fixation of base rate and cost of funds do not reflect the correct position have been suspected for quite some time and the way they run their credit port folio leaves much to be desired. The message of credit policy and the rationale behind the credit policy do not get percolated at all levels of banks’ management, their officials, auditors and their clients particularly large borrowers is a fact which needs to be addressed by the RBI and top management of banks. The awareness of economic policies and the objectives behind the fiscal ad monetary policies in particular at all levels of officials would go a long way in achieving the policy objectives is a serious matter which the RBI and the Government cannot afford to ignore if they are very keen to transform the economy and take it on a growth trajectory.          

Dr T.V.Gopalakrishnan