Tuesday, June 2, 2015

Analysis of - 2nd Bi-monthly Monetary Policy Statement, 2015-16 RBI - HEALTHY DEBATE NEEDED - RATE CUT NOT ENOUGH

An Analysis of the

Second Bi-monthly Monetary Policy Statement, 2015-16

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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