The Reserve Bank of India’s (RBI) six-member monetary policy committee (MPC) has reduced the repo rate — rate at which banks borrow from RBI — to 6% from the present 6.25%. The reduction in rate by 25 basis points (bps) was a foregone conclusion and factored by all stakeholders — stock exchanges, bankers, policymakers, corporates and analysts.
The reverse repo — rate at which RBI borrows from banks — gets adjusted to 5.75% and the cash reserve ratio — share of deposits which banks must park with RBI without earning any interest — remained at 4%.
The MPC, keeping in view the historic low levels of CPI inflation at 1.5%, favourable and well-distributed monsoon (except interior Karnataka and Tamil Nadu), comfortable forex reserves at $390 billion, strong rupee vs dollar at Rs 63.91, low oil prices, seems to have succumbed to the psychological pressure and clamour by the central government, corporates, bankers and opinion makers for rate reduction. The token rate reduction can at best be a mood elevator. The “unkindest” cut at this juncture was not warranted, irrelevant and exposes the RBI as a “Reactionary Bank of India”.
The anaemic dose of rate reduction will not have the desired impact on a sagging economy. The sad scenario is of twin balance sheet issue — banks bleeding with non-performing assets (NPA) resulting in diffidence to lend to growth sectors and big corporates/industries with huge debts, excess capacity and virtually on “ventilator” for staying afloat.
The banks’ NPA levels are humongous at Rs 12 lakh crore. The credit offtake is dismal and at its historic low of 6% as of July (10.26% — April 2016). Most of this lending is in the personal, vehicle and educational loan segments and not to the core sectors — infra, roads, cement, steel, real estate and housing — which are the “engine drivers” of growth, having a huge multiplier effect on employment, income and savings.
Credit push to these sectors will trigger private investment which is at its lowest ebb. Lending to the housing sector under the prime minister’s mission for “housing for all” by 2022, the position is misleading.
Most of the lending by the banks/Housing Finance Corporations (HFCs) to this sector is witnessing “take over” of loans from one institution to another, retiring high cost with low-interest rate loans. The resultant effect is a huge activity without any net increase in the housing stock, thus defeating the very purpose of the noble programme.
The depressing scenario is validated with the pathetic eight core sector growth of 0.4% in June (7% in June 2016), coupled with a contraction in the critical sectors of coal mining (-) 6.7% and cement (-) 5.8%. To add to the misery, there has been a terrible dip in the manufacturing sector which is a litmus test of growth and pipeline status of “orders” booking.
The Nikkei India Manufacturing Purchasing Managers’ Index (PMI) for July at 47.9 (50.9 in June) has been the lowest since 2009 and lowest amongst 20 peer countries. Reading below 50 signifies growth “contraction.” The position is a reflection of the aftermath of Goods and Services Tax (GST) disruption, demonetisation and slow remonetisation.
The meagre reduction in the repo rate by 25 bps will not be transmitted by the banks to the existing borrowers nor will they lend aggressively to the growth sectors. Banks will take this opportunity to tweak their deposit rates in the downward direction as already demonstrated by the leader, SBI, which has reduced 50 bps for savings bank accounts to 3.5% from 4% up to Rs 1 crore.
Eye on balance sheets
The rate reduction will only help banks to improve their balance sheet figures at the cost of senior citizens/retirees who would look for fixed monthly income on their fixed deposits with banks, which will now be unremunerative.
Experience has shown reluctance by the banks to reduce lending rates during the festive season (August- December) except some tinkering with rates, fee waivers, including for switchover of loans.
The impact of huge liquidity in the system without any safe, remunerative saving instruments for customers in banks is witnessed with the unrealistic rise in the Sensex which has crossed the historic 32,000 mark. The gullible public is investing heavily in stocks and shares without assessing the financials, fundamentals/credibility of the companies which has led to huge over valuations.
Inability to park unaccounted cash/black money in real estate projects on account of Real Estate (Regulation and Development) Act (RERA) will seep “hot money” into risky and inflationary investment avenues. The burst and crash of the asset bubble in stock exchanges and real estate are around the corner.
Heroic surgery has to happen in redressing banks’ “stressed assets” cancer as being experimented by the RBI with the “dirty dozen” corporates through the National Company Law Tribunal. State governments should desist from indiscriminate farm loan waivers.
The Centre should back up through structural reforms, including “single-window approvals” for growth sectors like housing, infrastructure, power, labour reforms for creating gainful employment and overcome farm crisis without any new policy announcements that will disrupt and dent the economy.
(The writer is a Bengaluru-based economist and banker)
Published 15 September 2017, 15:18 IST