Free Press Journal

RBI governor Raghuram Rajan has his way


Reserve Bank of India Governor Raghuram Rajan did not cut interest rates on Tuesday, but he did the next best thing possible. That is, he made the big banks reduce lending rates in the light of the 50 basis points reduction he had already made in the basic rate earlier.  Following his stern advice, at least three major banks, including the State Bank of India, lowered lending rates marginally. Rajan had already tempered expectations of a rate cut, given that his previous cuts of 25 basis points each were unscheduled and had taken everyone by surprise. Markets were not expecting a repo rate reduction — it is the rate at which the central bank lends to the commercial banks — following the earlier 50 basis points in the policy rate. But given the pro-growth atmospherics all around, there was expectation that he would ease at least one of the two other relevant limits to increase liquidity in the system. However, Rajan kept both the cash reserve ratio and statutory liquidity ratio unchanged. Quite clearly, he was of the firm view that neither was an obstruction in boosting credit offtake. If the demand for credit was still sluggish, other factors were at play. Indeed, the reluctance of the banks to cut the lending rates following the RBI reduction in the policy rate reflected their unhappy lending records, rather than anything else. With nearly 12 per cent in non-performing assets, the banking industry was unfairly penalising good borrowers, by seeking to retain high lending rates with a view to recoup losses from bad loans. This was not good banking. Nor was it fair and just towards honest customers. But over the years, laxity in lending to big borrowers and the lack of stringent laws to recover dues from wilful defaulters and abusers of the banking system had obliged the banking sector to write off huge sums of money as irreparable losses at regular intervals. Ultimately, the costs are borne by taxpayers and retail depositors who fail to get inflation-plus interest on their deposits. Indeed, more than one bank CEO referred to the costly deposits while making out a case for retaining high lending rates. Rajan’s stern message, however, broke their resolve. In any case, the small surge in inflation in recent days and concerns about the rabi crop due to the unseasonal rains signalled caution against another repo rate cut. Economic pundits seemed to be prepared for a no-change announcement on Tuesday, but there was near unanimity that at least one more 25-basis-point cut in repo rate was likely, most probably in June, when Rajan is set to review the monetary policy next.

Fadnavis is straying

Here is a bit of friendly advice for the NDA. Before saying or doing anything, it should always consider whether that is what it had promised on the stump while seeking power. If not, it should, as a rule, steer clear of it. We are constrained to offer that gratuitous advice because several NDA ministers have made utter fools of themselves by talking nonsense. Space does not permit listing all their rantings. But if a Goa minister thinks that wearing traditional clothes with a big dab of vermillion on the forehead will prevent eve-teasing or worse, he probably needs to get himself acquainted with the reality on the beaches of his state. Uncouth and ill-bred men would treat women badly anyway, regardless of their manner of dress. In neighbouring Maharashtra, Devendra Fadnavis seemed to be a modern-minded leader with a realistic outlook on men and matters. Unfortunately, he is forcing revision of that assessment. After the beef ban, the talk of prohibiting consumption of all meats was really scary. Fortunately, it has been quelled, but not before attracting adverse oodles of bad publicity.  But this fiat to multiplexes to screen at least one Marathi film during prime time is no less authoritarian. Ironically, a party that believes in free competition in the market place is seeking to go against the cardinal supply- and-demand principle that informs the working of businesses everywhere. Surely, if there are enough people wanting to watch a Marathi film, multiplexes would be foolish to miss an opportunity to grow their businesses. The point is that the state has no business to interfere in…well, such business decisions. What next? Will the Fadnavis Government decide which Marathi movie must be screened at which theatre? What if there are no takers for such films, or, simply, there are no new Marathi films to be screened? In that case, will the ruling coalition compensate the exhibitors for running old and flop films to empty halls? As we said at the outset, get on with the task of fulfilling electoral promises instead of straying into unproductive areas. Even the Marathi manoos will be happy if the government concerns itself with  economic development, jobs, education, `bijli, sadak, pani’ and so on.