Given the complexities of the Indian economy and its inter-connections with the outside world, a rate reduction by the monetary authority alone will not suffice at the present juncture. Oftentimes the RBI has indicated this in a subtle manner. The latest policy suggests that the fiscal bosses cannot avoid the onus of pushing the economy to a higher growth trajectory without inflationary consequences. “Strong food policy and management will be important to help keep inflation and inflationary expectations contained over the near-term,” the RBI has said. At the same time, it has advocated a ‘step up’ in public investment in several areas that could ‘crowd in’ private investment. To remove supply irritants and aid disinflation, public investment is critical. With stressed assets eating into its vitals, the banking industry is largely reluctant to commit itself to fresh credit exposure. “A targeted infusion of capital into scheduled public sector commercial banks… is also warranted so that adequate credit flows to the productive sectors as investment picks up,” the RBI has stated. It takes two to tango, the central bank appears to suggest. The ball is now in the government’s court.
The 25 basis-point cut announced in the repo rate, the rate at which the Reserve Bank of India lends to banks, was indeed on expected lines, although there might be some disappointment with regard to the quantum of the reduction. Why is the RBI playing so cautious, however? The reasons are not far to seek. The banking sector, which has been struggling to bring down the bad loan load, has shown a certain defiance when it came to passing on rate cuts to borrowers. It took a “no fresh rate cut warning” from Governor Raghuram Rajan to goad them on to cutting lending rates, however reluctantly. With the latest cut, the third this year and announced as part of the policy cycle this time for a change, the RBI appears to have given banks a fresh message. Given the level of bad loans in their books, and also considering the stress on their margins, the banks will now have to do a tough balancing act. The RBI has only limited width to go beyond taking a measured step. The central bank is still unsure if the inflation clouds have disappeared completely. Concerns over the below-normal south-west monsoon predictions, oil prices firming up amid volatility, and the ever-present geopolitical risks, appear to be bothering it. A combination of macro-numbers — such as of falling retail inflation and factory output — and political pressures has put the RBI in a spot. So it has, quite understandably, chosen to tread with caution.
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