It is heartening that the central bank governor chose to shift the policy stance in favour of growth since sluggish growth has persisted for the fifth consecutive quarter
It is heartening that the central bank governor chose to shift the policy stance in favour of growth since sluggish growth has persisted for the fifth consecutive quarter
The Reserve Bank of India’s generous cut in the cash reserve ratio, which will release Rs 18,000 crore into the banking system, and the repo rate by a quarter per cent each has come as huge relief to bankers, corporate outfits and particularly individual borrowers.
The latter can expect their monthly instalment payments on loans to fall; as one banker said, it is the best time for small depositors, indicating that deposit rates may not go down further even though lending rates will go down.
Bankers have assured the RBI of an early transmission of the benefits of the cuts in both repo rate (that which banks pay the RBI on short-term loans) and CRR (the proportion of deposits that banks must keep with the RBI). Tuesday’s cuts were all the more welcome after the hawkish stance taken by RBI economists in the Macroeconomic and Monetary Developments report released the day before the credit policy announcement. That report was quite forceful in outlining the risks from suppressed inflation, supply side constraints, the increasing current account deficit and the fiscal deficit.
RBI governor D. Subbarao however decided to meet the government more than halfway by his generous policy stance announced Tuesday. Making a persuasive case for easing monetary policy despite inflationary expectations and other fiscal concerns, he said he was going by the fiscal roadmap and other announcements made by Union finance minister P. Chidambaram on fiscal management. It is all the more welcome at a time when the government, particularly the finance minister and Union commerce minister Anand Sharma, have been on roadshows overseas making high-profile pitches to attract foreign in investors to India.
It is heartening that the central bank governor chose to shift the policy stance in favour of growth since sluggish growth has persisted for the fifth consecutive quarter, leading to a fall in consumption demand, slowing investments and declining exports. The RBI has revised its GDP growth estimate to 5.3 per cent, down from October’s 5.5 per cent.
Tuesday’s credit policy document also stands out as for the first time in recent years the governor refrained from commenting on the shortcomings on the fiscal front and the government’s role in this. Monday’s MMD report was, however, quite direct in pointing out the lack of infrastructure and failures of the government in sorting out issues like coal shortage and environment and land clearances etc, which are holding back investments that are available. Investments, it said, was a necessary ingredient for growth. It also said that the RBI’s supportive monetary policy was constrained due to the preponderance of non-monetary factors behind the current slowdown in an environment beset by high inflation risks and the current account and fiscal deficits.
