The new Reserve Bank of India Governor’s first monetary policy review turned out to be a damp squib. One really missed the flair of the just previous Governor, Raghuram Rajan. There was no free-wheeling discussion or an opening tour de force statement.
The Central bank announced a 25 basis point cut in the interest rate. This is in line with the long-standing demand of the Union Finance Ministry that interest rate should be cut to encourage economic growth. The marginal cut is neither here nor there in encouraging growth as the extent of the cut is too small. But the cut in interest rate when the economy is not doing badly and the inflation rate is higher than targeted level, smacks of conformity with government demand.
The RBI Governor Urjit Patel attempted to explain the policy, saying food inflation has surprisingly stayed low and a strong monsoon has raised expectations of good agricultural growth. Moreover, there was a sense that the global economy is doing worse than was thought, he said. As a result, the lower interest rates should make credit much cheaper across the system, provided the banks pass the rate cut onto their customers.
In his first post-policy press conference, Dr. Urjit Patel made a rather anaemic opening comment, read out from a prepared text holding no major observations at all. As for the policy itself, it was a departure from the past as the policy decision on interest rate fixation was no longer the executive fiat of the Governor. It was decided by a six-member monetary policy committee (MPC), of which three were external members. But the RBI has not changed its inflation expectations, with the review, in fact, saying there are still upside risks. Despite the positive language about India’s economy in the policy review, the Central bank could be indirectly communicating concerns that everything may not be well.
Unlike previously, the Governor’s press conference was over in hardly twenty minutes without too much questioning or observations on broader themes or global references. In sharp contrast, it may be recalled that the former Governor, Rajan, had gone out of his way to express RBI’s independence to the extent of observing once that RBI could not play the role of a cheerleader for the government in its efforts to present the picture of a buoyant economy. Rajan had also observed in an interview that too much of boasting about India’s high growth rate when rest of the world was stagnating, was like the Hindi proverb “andho me kana raja” (the one-eyed king among the blind).
The government can sleep well now, going by the behaviour of the new RBI. It has scuttled the role of the Governor in formulating monetary policy through instituting the MPC. This might be in line with global practices when all the major Central banks, from the US Federal Reserve to the Bank of England, go by the verdict of a policy committee rather than an individual Governor.
Perhaps the announcement of the re-jigging of the interest rate policy was the least part of the monetary policy statement. Dr Patel spoke of the issue of non-performing loans of commercial banks and reiterated the resolve to address the issue squarely. Dr. Patel, however, stated that the resolution of the NPA problem would have to be done with pragmatism than with a retributive zeal. This is also a departure.
He stated that the NPAs had risen over time and therefore should be treated in a way so that the productive sectors do not face a shortage of credit. Dr. Patel said that RBI was working with the government and the banks.
Dr. Patel pointed out that 61 percent of the bad loans with the banks were locked up in five sectors, namely, infrastructure, steel, textile, power, and telecoms. These sectors are the core of the economy and sticky loans to companies in these sectors will have to be looked into so the projects are not stalled. He assured that RBI will pursue the NPA issue and see to its successful conclusion.
Along with the policy statement, the RBI has announced measures for several key long-term reforms of the financial sector as well. These include certain critical reforms of all India financial institutions. The all India financial institutions would have larger capital bases in line with the Basel requirements.
Dr. Patel had stated global threats to the present situation and subsequent threats posed by these. He referred to the policy stance of major Central banks, including their policy to keep interest rates in the negative zones. These were leaving large imprints on the emerging market economies. He feared that in the World Bank-IMF consultations in Washington this week, the global growth prospects could be cut further.
(The views expressed are strictly personal.)