This refers to your editorial another Baby step (BS dt 4/4/16).The expectation of another policy rate cut ranging between 0,25% and 50% is very high although the pick up in credit off take and surge in demand for products of all kinds have not been anywhere near any justifiable level. Just sentiments and market pressures alone cannot be the deciding factor for RBI to cut the rate though the other fundamentals of the economy Viz Whole sale Price Index, Fiscal Deficit, Current account deficit despite not much of eports are all favourable and the Government's measures to give a boost to industrial and agricultural production are somewhat positive. The gambling on monsoon is still a challenge and the Consumer Price Index continues to be unpredictable true to pattern.
However, RBI needs to be really concerned about the liquidity crunch the banks are facing in the background of falling deposit growth, staggering Non performing loans, and not so impressive budget support to generate domestic demand. RBi has to necessarily take some policy measures to enhance the liquidity and generate credit demand with all the limitations both the domestic and external economies are subjected to. Marginal Cost of Funding related lending rate is a new phenomenon the banks have to pursue and expand credit and this also is a factor RBI has to factor into, to make the banks fall in line to RBI's expectations of transmission of monetary policy. All said, lot of speculations are there in the market and RBI has to fine tune its policy rates to suit both the domestic and external economic conditions, market sentiments, expectations of depositors and investors and above all the Government's own thinking to give a boost trough the monetary policy covering up all the gaps observed on the fiscal side.
Dr T V Gopalakrishnan
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