JOIN USAhead of every bi-monthly credit policy review, expectations run high on the Reserve Bank of India (RBI) cutting the repo rate, while the mandate given to the central bank by Parliament is to keep retail inflation around 4% on a sustainable basis. To be fair to the RBI, it has reduced the lending rates by 200 basis points since January 2015, though banks have not fully transmitted it to the borrowers. The run-up to the policy review on August 2 was no different with demands ranging from modest to aggressive reduction in the rate. While the Monetary Policy Committee (MPC) did announce a 25 basis point cut in the repo, the commentary by the RBI made it clear it could do only this much for reviving the private sector investment and the ball is now in the court of the government. Also, other variables like the problem of twin balance sheets of the banks and the debt-ridden companies must fall in place for a meaningful pick up in investment-driven economic expansion.
Besides, the RBI raised a red flag after several states waived farm loans and how this populist measure would damage the quality of public expenditure:
“Implementation of farm loan waivers by states mayresult in possible fiscal slippages and undermine the quality of public spending, entailing inflationary spillovers.” The RBI also reminded the Centre and the states of their responsibility of removing infrastructure bottlenecks and providing the right environment to sectors like housing, which can propel growth: “The MPC is of the view that there is an urgent need to reinvigorate private investment, remove infrastructure bottlenecks and provide a major thrust to the Pradhan Mantri Awas Yojana for housing needs of all. This hinges on speedier clearance of projects by the states.”
The committee noted with concern that the high levels of stress in twin balance sheets – banks and corporations – are likely to deter new investment. On inflation, the RBI is still not convinced whether the fall in prices is a result of seasonal and cyclical factors or some good steps taken by the government to fix the supply side of the economy. It said a conclusive segregation of transitory and structural factors driving disinflation is still elusive. The MPC has a point here as well; as is evident from the latest spike in tomato prices. Food products either rot in the garbage bins or get locked up in warehouses. The RBI has done its bit, the government must act now.