Hello and welcome to exampundit. Here is today's Editorial from the very best The Hindu titled "RBI monetary policy: Growth, with caveats".
Today's topic: RBI monetary policy: Growth, with caveats
The central bank was not expected to tinker with key policy rates in its first monetary policy review of 2017-18 unveiled on Thursday, following its decision to shift from an accommodative to a neutral monetary policy stance in February. The Monetary Policy Committee chaired by Reserve Bank of India Governor Urjit Patel has, in fact, decided to raise the rate at which the central bank borrows funds from banks (the reverse repo rate) by 25 basis points, from 5.75% to 6%, while leaving other policy rates untouched. This marginal change is aimed at sucking out from the system excess liquidity that remains a lingering concern, despite coming off its peak in the aftermath of the demonetisation exercise. The RBI has also proposed a new liquidity management tool that awaits government approval, making the draining of surplus liquidity a critical priority all through this year. The efficacy of the RBI’s liquidity management toolkit will impinge on another key concern: inflation, which is expected to climb to 5% by the second half of this fiscal. The RBI says achieving the stated target of 4% inflation even next year could be challenging, with no “lucky disinflationary forces” expected, such as benign commodity and oil prices. It has also pointed to a one-time upside risk to inflation with the implementation of the Goods and Services Tax.
The RBI is quite optimistic about an uptick in the economy this year, projecting 7.4% growth in Gross Value-Added, compared to 6.7% in 2016-17. Along with improved prospects for the world economy a rebound in discretionary consumer spending at home is likely, in line with the “pace of remonetisation” and investment demand on account of lowered interest rates. While the government may take heart from the higher growth projection, it must pay equal heed to Mr. Patel’s plainspeak on four key issues. First, the need to urgently resolve the surge of bad loans on bank books, for which the RBI will unveil a new Prompt Corrective Action framework by the middle of this month. Without this, a virtuous cycle of healthy credit growth necessary for investment and job creation will remain elusive. Second, the RBI has reminded the government there will be “clearly more demand for capital” in the coming days. The government’s allocation of Rs.10,000 crore to recapitalise public sector banks is obviously inadequate. Third, while banks have reduced lending rates, the RBI has pointed out there is room for more cuts if rates on small savings schemes are corrected. Though a formula-based rate was adopted to set these rates last April, small savings schemes still deliver 61-95 basis points higher returns than what they should if the formula is followed, as per the RBI. Most important, the government must not ignore Mr Patel’s categorical call to eschew loan waivers of the kind just announced in Uttar Pradesh. This, he warned, would crowd out private investments and dent the nation’s balance sheet.
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