Sustained low inflation must for lower fund costs, RBI tells India Inc
18 Sept 2015 7:10 AM IST
Ahead of the bimonthly monetary policy review, RBI Deputy Governor Urjit Patel on Thursday said sustained low inflation over medium- to long-term is necessary to bring down the cost of fund. “Sustained low inflation... at a low enough level is an important ingredient for making the cost apposite to that particular level of inflation and inflationary expectation. “It’s not inflation last week or last month but its medium- to long-term inflation,” he said.
Inflation, which RBI takes into account while deciding the interest rate, has remained low for the past several months. While the wholesale price index (WPI) remained in negative territory for 10 months in a row, the retail inflation (CPI) eased to 3.66 per cent in August. RBI is scheduled to announce bimonthly monetary policy review on September 29. In the last policy review on August 4, RBI had kept its policy rates unchanged because of elevated inflation level.
Besides, Patel added, <g data-gr-id="38">fiscal</g> deficit of both the central and state governments also play an important role in determining the cost of <g data-gr-id="39">fund</g> as the center and states combined together are the largest borrowers in <g data-gr-id="40">world</g> over. “The other is credible programme of fiscal rectitude by the government... both the central and state governments can help... and the reason is they are in direct competition with other long-term borrowers,” he said, adding the largest borrower across the world is the government.
The deputy governor also said that higher cost of restructuring pushes the cost of <g data-gr-id="42">fund</g> and RBI is trying to address this issue. “The higher the cost of restructuring, the higher the cost of debt workout, the more it builds in the cost of capital from the side of the lender, and this is something we are in middle of addressing,” he said.
In addition, he said a competitive, vibrant banking system is important for lowering cost of capital, and a lower taxation too is helpful. As part of efforts to deepen financial inclusion, RBI on Wednesday granted small finance bank licences to 10 entities.
“We announced licences for small finance bank with <g data-gr-id="33">focus</g> on small borrowers. So, this addresses niche requirement that is there to be addressed for ‘Make In India’ for creating entrepreneurial numbers to create one million jobs per month,” he added.
Reserve bank expects CAD to be 1.5% of GDP
RBI Deputy Governor Urjit Patel on Thursday said the central bank expects Current Account Deficit (CAD) around 1.5 per cent of GDP in the current fiscal. “This year, our current account deficit would be in the region of 1.5 per cent of GDP,” he said at an event here. For the first quarter ended June, CAD narrowed to 1.2% of GDP at $6.2 billion following <g data-gr-id="77">contraction</g> in <g data-gr-id="78">trade</g> deficit and higher earnings from services exports. He noted that higher cost of restructuring pushes the cost of capital and RBI is trying to address this issue. “The higher the cost of restructuring, the higher the cost of debt workout, the more it builds in the cost of capital from the side of the lender, and this is something we are in middle of addressing,” he said. <g data-gr-id="90">Fiscal</g> deficit of both the central and state governments also plays an important role in the cost of capital as they are the largest borrowers, he added.
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