The RBI's monetary policy(announced on 8/2/16)stance change from being accommodative to neutral is perhaps a message to the Government and banks that more fiscal and administrative measures are needed to kickstart the economy particularly after the stagnation witnessed thereon since demonetisation of high denomination notes.The banks are flooded with funds and the cost of funds has come down but the transmission of the earlier reduction of policy rates ie 1.75% effected by the RBI has only been partial leaving little room for RBI to warrant another reduction. But for the benign inflation, all other macro and micro economic factors have not been favourable and the external economic conditions also do not seem to be very conducive for change in policy rates is a fact which cannot be overlooked by the Monetary Policy Committee.Further, the banks' own financial position is also not very comfortable with ever increasing non performing loans adding to the cost of funds and threatening to the financial stability. The poor demand for bank loans also reflects on the lower demands on products affecting investment, production and recycling of funds.In this background, the present approach of the RBI is very appropriate and is a food for serious thought for all policy makers to revive the economy and banks as well to perform.RBI may have to wait for a few quarters more to have a feel of the impact of the recent budgetary measures on the economy in general and industrial production in particullar to consider policy rates changes.
Dr T V Gopalakrishnan
