India Inc aspires for a massive cut in prime lending rate, but the Reserve Bank of India (RBI) under the leadership of Governor Urjit Patel is not keen to oblige them. As a result, the Central bank recently cut the key policy rate by just 0.25 per cent. Patel’s predecessor Raghuram Ram Rajan too refrained from giving in to any kind of pressure and stood firm in his assessment that the time was not yet ripe to go for major lending rate cut, though India Inc kept asking for more. Many a time even Finance Minister Arun Jaitley was not happy with the RBI’s stance on the issue of rate cut. Rajan did not compromise with his stand till he completed his tenure at the RBI. It was expected that his predecessor Patel too would not be able to deviate much from the line taken by his immediate predecessor, which also reflected in his latest minimal rate cut decision. It is true that inflation is moderating, but the goods of daily use are not getting cheaper. There is an obvious mismatch between statistical inflation rate and the actual prices on which consumers are buying essential items of daily use. It is not only a case of demand and supply gap, but also the lack of governmental monitoring of the whole situation. Unfortunately, the producers of essential commodities—farmers—are not get remunerative prices.
If one looks at the ground realities, the RBI is acting quite cautiously. The challenge before the Centre and the RBI is not only to accelerate the growth rate, but also to sustain its pace. Therefore, Finance Minister Arun Jaitley was quite correct in saying that the ‘key rate by 0.25 per cent is an important step to achieve sustained growth consistent with moderate inflation and India’s potential.’ RBI, in its third bi-monthly monetary policy of the fiscal, reduced the
repo rate after a gap of almost 10 months, which now stands at 6 per cent, the lowest in six-and-a-half years. The last rate cut was effected in October 2016.
The Central government had been pitching for a rate cut to boost economic growth amid retail inflation falling to a historic low of 1.54 per cent in June. RBI has also decided to keep the policy stance neutral and to watch incoming data with a view to keeping headline inflation close to 4 per cent. It has also stressed on urgent need to reinvigorate private investments, clear infrastructure bottlenecks and provide a major thrust to the Pradhan Mantri Awas Yojana (PMAY). The new rate cut makes EMI lesser on auto and home loans, raising some hope for the realty and automobile sector.
The latest rate cut will give a fillip to growth, especially at a time of benign core inflation print and tepid private investment. To improve the private investment, the rate cut is not the only measures, but the Centre should also take effective measures in ensuring that the NPAs of public sector banks turn into performing assets (Pas). It is immaterial now whether 25 basis points cut make any difference ‘to the debt servicing burden of the borrowers, especially the
over-leveraged corporate’ or not. The corporate sector must also join hands in appealing the willing defaulters to return the banks’ money.
In the name of enhancing exporters’ competitiveness in the international market, the RBI cannot take unrealistic view of the growth inflation dynamics, which seem to be currently muddled with a
number of short-term disruptions. The Monetary Policy Committee (MPC) of RBI had noted that some of the upside risks to inflation have either reduced or not materialised. Consequently, some space had opened up for monetary policy accommodation, given the dynamics of the output gap.
Accordingly, the MPC decided to reduce the policy repo rate by 25 basis points.
“The trajectory of inflation in the baseline projection is expected to rise from current lows. So, the MPC decided to keep the policy stance neutral and to watch incoming data. The MPC remains focused on its commitment to keeping headline inflation close to 4 per cent on a durable basis. Our stance is what it should be and what it was in June,” added Patel. MPC must be vigilant about ‘movements in inflation to ascertain if recent soft readings are transient or if a more durable disinflation is underway.’ The headline inflation will certainly go up if the states choose to implement salary and allowance increases similar to the Centre in the current financial year.
CRISIL, a rating agency, said in a statement that “the policy rate cut was in line with our expectation. In our view, the timing was opportune since inflation has dipped to record lows and is only likely to rise gradually hereon. For the first quarter of fiscal 2018, consumer price index (CPI) averaged 2.2 per cent, which is closer to the lower bound of the MPC’s forecast of 2 to 3.5 per cent for the first half of the year. For the second half, the MPC forecasts
inflation around 3.5 to 4.5 per cent. Despite a rate cut, the MPC’s policy stance has been kept neutral given the expected uptick in inflation.”
George Alexander Muthoot, MD, Muthoot Finance Limited, said: With acceptable inflation levels, the focus is clearly towards driving the growth. We expect the rate cut will support the economy’s investment demand and uptick in credit environment. India Inc has been patient
equally with the regulator and the relief on the cost of funds would help them to improve financial health and plan for the next leg of growth. So in summation the interest rate scenario should change for good in FY18.” Shashidhar Pai, MD, Citrus Ventures, said: “For the real estate industry that is going through a major shake-up due to weak demand, tough regulatory changes and ever increasing costs of inputs like steel, cement, tiles etc., a significant reduction in
interest rate could have acted as a booster dose.”
(The writer is independent commentator on politico-economy and social issues. Views are his personal)