An Analysis of the
Second Bi-monthly Monetary Policy Statement, 2015-16
RESERVE BANK OF INDIA
Today, RBI has come out with its second Bi-monthly
Monetary Policy Statement for 2015-16. On
the basis of an assessment of the current and evolving macroeconomic situation,
it has decided to:
reduce the policy repo rate under the
liquidity adjustment facility (LAF) by 25 basis points from 7.5 per cent to
7.25 per cent with immediate effect;
keep the cash reserve ratio (CRR) of
scheduled banks unchanged at 4.0 per cent of net demand and time liabilities (NDTL);
continue to provide liquidity under
overnight repos at 0.25 per cent of bank-wise NDTL at the LAF repo rate and
liquidity under 14-day term repos as well as longer term repos of up to 0.75
per cent of NDTL of the banking system through auctions; and
continue with overnight/term variable rate repos and
reverse repos to smooth liquidity.
Consequently, the reverse repo rate under the LAF
stands adjusted to 6.25 per cent, and the marginal standing facility (MSF) rate
and the Bank Rate to 8.25 per cent.
As always, RBI’s review of
economic situation in the rest of the world is impressive. Likewise, the facts
about Indian economy also are impressive.
That said, the final Policy
stance for reducing the repo rates just by 25 basis points is highly
disappointing.
Repo Rates in India at 7.25%
are certainly very High compared to the Rates in the economies with which RBI makes the
comparison.
The interest rates for all
types of loans by Indian Banks, based on
these repo rates is much higher and far less competitive, compared
to the interest rates on loans offered by most other countries in the world.
How can India continue to
keep such High Interest Rates on loans for so many years and expect India to become
competitive with those world Economies with which it makes its comparison?
We all know that, most Indian
Corporates are going for loans to the Banks of the other countries with which
RBI has made its comparison.
In all the analysis that RBI
makes in its monetary Policy statements, there are crucial points that it fails
to analyze and explain :
i.
Why are Indian Banks unable to lend to the Indian Corporates and foreign
Corporates– especially for capital asset
formation?
ii.
Why are Indian Corporates always approaching foreign Banks for their Huge
needs – for Capital asset formation? (recent example :Airtel)
iii.
Why is growth so sluggish in a developing country like India which has
huge need for growth and asset formation as also income growth and
distribution?
iv. Why are Indian Banks lending mostly to retail and priority sectors?
v.
Is this trend of lending by Indian Banks inflationary by nature or not?
Technically it is, but factually, it has not been, due to the huge unmet needs
of the buyers.
vi. Why are NPAs in respect of loans to Industry by Indian Public sector Banks so
High? Why are whole industrial sectors failing to repay loans to Banks in
stipulated times?
vii. Why is Demand Growth for Industrial products so sluggish in India? This is so,even
while demand for service sector products remains reasonably High?
I feel, RBI monetary Policy
must throw light on these aspects which are closely connected with the success
and failure of the REPO rates. But, this has not been happening.
RBI says, the third bi-monthly
monetary policy statement will be announced on August 4, 2015. But, the
continuance of the present repo rates, in my view, is unhealthy and
uncompetitive for India. I feel, our Repo Rates must be aligned with those of
developed economies – though gradually. This time, it could preferably have
been a 50 basis point cut. The 25 basis point cuts subsequently also must be
faster than at present. RBI must then nudge Indian Banks to reduce the interest
rates on loans in line with its rate cuts. Rates must come down to around 5%
by this year end. This is my personal feeling. Economists and others in the
Industry and other sectors must debate on RBI Policies. But, there seems to be stoic acceptance of monetary Policy rather than healthy debate on it.
Of course, the age old saying is there
– that no two economists can agree on such subjects. I am far from being an
economist. I look at the economy standing a little away from Keynesian
theories. I feel these theories are too old to serve practical economics of today. World
has moved far, far away from Keynesian models.
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