Monetary, fiscal polices must work closely: RBI Guv Das

Early results of the Reserve Bank of India’s survey suggests manufacturing sector pain and services sector activity has moderated, warned Governor Shaktikanta Das. He said the monetary and fiscal policies must work in close coordination to address the slowdown.

He hoped the Union Budget would provide “greater clarity” about measures the government may initiate to address the slowdown.

The slowdown in manufacturing activity was also reflected in a decline in capacity utilisation (CU) to 68.9% in the September quarter from 73.6% in June quarter in the RBI’s inventories and capacity utilisation survey (OBICUS).

Seasonally adjusted capacity utilisation also fell to 69.8% from 74.6% during the same period. Growth in the services sector moderated, weighed down mainly by trade, hotels, transport, communication, broadcasting services, and construction activity, Das was quoted as saying by the minutes of the monetary policy committee released on Wednesday.

Capacity utilisation refers to the manufacturing and production capabilities being utilised by an enterprise at any given time. Lower capacity utilisation by industries implies a higher cost of production and a lack of competitiveness in the domestic and international markets.

The industry has not been performing too well in the past, which is reflected in the muted new investments despite the RBI cutting key interest rates by 135 basis points this year so far.

It was in this backdrop that the Governor said the monetary and fiscal policies must work in close coordination, indicating the fiscal policy too needs to supplement by being expansionary at the moment to take care of demand-side measures.

Another monetary policy committee member Chetan Ghate suggested that counter-cyclical monetary policy has not been as effective as expected due to inadequate monetary policy transmission.

Weak monetary transmission is one of the factors that has resulted in the poor macroeconomic equilibrium the economy is currently in and it could lead to excesses in the financial sector.

Das said while the monetary transmission had been full and almost instantaneous across various money market segments and private corporate bond yields, it was partial to the government security
market and remained inadequate to lending rates of banks. The 1-year median marginal cost of funds-based lending rate (MCLR) declined by 49 basis points during February-November. The weighted average lending rate (WALR) on fresh rupee loans sanctioned by banks declined by 44 basis points during Feb-Oct, while WALR on outstanding rupee loans increased by 2 basis points during the same period.