The Monetary Policy Committee of the Reserve Bank which met last week in Mumbai, as expected, left the policy rates unchanged but the central bank had other tools at its disposal to further ease liquidity in the system to try and energise growth. Given its remit to control inflation within the prescribed four to six per cent band, the MPC had very little space for a rate cut anyway. Before it administered pause, the MPC had cut the policy rate in successive bi-monthly sessions over a period of more than one year by as much as 135 basis points. With consumer inflation running at over seven per cent, mainly due to high fruit and vegetable prices, a rate cut was not advisable. Although the MPC expected the consumer prices to ease following the increased supplies of onions, tomatoes and other vegetables in the market, it projected inflation to come below four per cent only in the third quarter of 2020-21. However, in the absence of rate-easing by the MPC, the central bank still managed to infuse nearly Rs 1 lakh crore into the banking system by providing relief on the cash reserve ratio. Loans given to designated sectors such as residential housing, automobiles and micro, small and medium enterprises till July 31 will be out of the purview of the specified CRR. In other words, banks will have additional Rs 1 lakh crores at their disposal for lending to the specified sectors. The poor take-off of credit in recent months to the corporate sector was partially offset by the higher lending under various schemes to the micro, small and medium enterprises. But the growth rate continues to slip in absence of pick-up by major drivers in the economy such as manufacturing, exports, real estate, etc. Besides, there is excess liquidity in the system to the tune of Rs 3 lakh crores. Transmission of reduced PLR to borrowers has always been a concern for the RBI. In the past, banks had generally failed to pass on the cuts in repo rate to borrowers. Lending rates ideally should reflect the cost of funds plus reasonable administrative expenses but they rarely do with most banks choosing to load other expenses into the overall rate. However, given the economic slowdown and the active intervention of the central bank in overseeing the sector, it is more than likely that most banks would fall in line. Meanwhile, there is no indication that the Budget will have a salutary impact on growth. Despite claims by the Finance Minister that it offers impetus to growth, most sections of industry and commerce remain unimpressed. It is because the budget has small bits for a number of economic actors but lacks a clear-cut booster for the main drivers of the economy.Unless there is a revival of industry, real estate, exports and agriculture, growth will continue to be driven by cyclical factors. In recent days, following the coronavirus epidemic there was a sharp fall in the crude oil prices globally. While it may reduce the import bill for POL, it can be a double-edged weapon insofar as a commensurate reduction in pump prices would result in lower tax collections from petroleum products. As the budget confirmed, growth in household savings has come down in recent years, an indication of pressure on incomes and rising joblessness. Paradoxically, without a pick-up in household consumption growth in manufacturing and service sectors is bound to be sluggish. It is also worrying that government spending on infrastructure, especially on roads and highways, has slowed down due to financial constraints. Mercifully, we have had a good monsoon this season which shows in an uptick in farm incomes. But confrontational politics exacts its own price on the overall economic situation. It will be wise for all actors to try and lower the tensions and concentrate on the economy.
