RBI credit policy: Bold and beautiful

RBI credit policy: Bold and beautiful

The bi-monthly monetary policy announcement of repo rate cut by 50 basis points (bps) by the RBI Governor Raghuram Rajan is stupendous. The surprise action including the tone of the message has stumped all his detractors including Subramanian Swamy of the BJP.

The sharp cut in the rate from 7.25 per cent to 6.75 per cent, the steepest in the last four and a half years, carries with it enormous responsibility on the government and on the banks.

The rate cut has been prompted by the retail inflation of CPI at 3.66 per cent which has stood the test of durability. The other favourable factors are wholesale price inflation (WPI) in the negative zone at minus 4.9 per cent in August, continued low prices of crude oil at less than $ 48 per barrel, plummeting commodity prices, comfortable foreign exchange reserves at $352 billion, manageable current account deficit at less than 4 per cent of GDP with not so alarming issues of the monsoon.

For the first time, the repo rate cut of this magnitude has been received with great applause from all quarters. There has not been a single negative vibe. The first of the salutes has come from Union Finance Minister Arun Jaitley who has welcomed the decision followed by lead by examples of cut in lending rate by the banks.

Rajan has also made it explicitly clear that the RBI would work with the government in tandem to permanently fix solutions to overcome the impediments that banks are facing for transmitting the full cycle of rate cuts to the customers. This includes activating the joint lenders’ forum (JLF) to address to the issues of stressed assets.  He is firm on no jugaad methods of fixing issues. 

The RBIs rate cut of 75 bps since January this year has just resulted in an average transmission to the extent of only 0.3 per cent only.  The governor is particular on the transmission of the cumulative rate cut of 125 bps  including the present 50 bps to be passed on to the corporates, industries, retail segment of housing, vehicle, personal loans, without much lag.

The pumping of funds will kick start the investment cycle, leading to accelerated economic growth through the multiplier effect. This is precisely the rationale of cutting the rate from the anaemic 25 bps, three times earlier, without much success, to the veterinary dose of 50 bps done in one stroke now.

The timing of the rate cut could not have been at a more appropriate time. The central bank is serious and intends to push the growth trajectories to almost on “auto pilot” mode before the hike in rate by US Federal Reserve, reversal of the crude oil prices and bounce back by China. The BRICS are falling apart except India.

Rajan wants the government and the industry to capitalise on the favourable global gloom, to our best advantage, in the next six months. That is, without squandering the opportunities and lead time available for us to galvanise the economy by overcoming the structural impediments.

Otherwise, the reduction in the rates can adversely affect savings and also build inflationary pressures from the implementation of the recommendations of the Seventh Pay Commission.

Engine of growth
Every policy, be it by the RBI or the government, is focusing on housing as an engine of growth. Rajan is no exception. In addition to the rate cut, the RBI has explicitly spelt out that the risk weightage on loans for affordable housing is being reduced. The present risk weightage on home loans stands at 50 per cent. If this is reduced to 25 per cent, the capital adequacy ratio (CAR) as per prudential norms gets reduced.

Banks and housing finance companies (HFCs) will aggressively lend to these targeted sections of MIG, LIG, and EWS at 8- 8.5 per cent. This will be a game changer and will directly trigger housing activity coupled with financial intermediation facilitating the realisation of the cherished goal of housing for all by 2022. This special dispensation accorded by the RBI would give fillip to the payment banks, small finance banks to lend to the most deserving sections up to a limit of Rs 25 lakh at very affordable rates.

Rajan has passed his exam. The ball is now in the government’s court. The government has to seriously work on the implementation of reforms – Goods and Services Tax (GST), passing of the land acquisition bill, bankruptcy code, reforms in the labour, power and infrastructure sectors.

Rhetoric should translate to actions. Parliament log jams and political vendetta should not ruin the great economic opportunities that we now have to capitalise to achieve GDP growth of at least 7.5 per cent plus from 2016 onwards.

The government should quickly go ahead with the infusion of capital to the ailing banks and appoint a special committee to monitor the “transmission process” of rate cuts by all the banks – PSUs and private. Otherwise, the Indian “economic party” will be ruined with posterity not forgiving us for frittering away the never before opportunities that are staring at us.

(The writer is an economist and a banker)

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