RBI focus shifts to government and industry

The RBI has pleasantly surprised everyone with a 50 basis points cut in the benchmark repo rate. Until it happened, not many were willing to wager a paise on such a hefty cut, with most anticipating only a 25 basis point cut, if at all. Having already cut the repo rate thrice this year, each time by 25 basis points, the RBI has played its part in boosting growth. With consumer inflation within the targeted ambit, it was not hard for the central bank to align the rate with the demands of the economy. Quite clearly, Governor Raghuram Rajan is keen to uphold his reputation for unpredictability. His sound academic credentials buttress his record as the central banker, with no one in a position to doubt his understanding of the domestic and global economic conditions. However, there was certain impatience in the voices of those who had taken to demand a hefty cut in the prime lending rate as if that alone was the panacea for the current economic woes of the country. Both the Government and the corporate sector were seeking such a cut. Now, they better prove themselves.

With the benchmark repo rate — the rate at which the banks borrow money from the central bank — now at 6.75 percent, the challenge lies in revving up the economic engine to ensure higher growth. Removing bottlenecks in the economy is   an onerous task in which both the producers and   governments must be engaged as partners. Monetary policy has limitations. Despite the rate cut, it cannot ensure that there is greater investment in commerce and industry. Other factors too must be conducive. Given the huge pile of debt under which the economy is reeling, with the banking system saddled with record non-performing assets, it is hard to conceive an immediate spurt in fresh off-take of bank credit. Even if banks pass on the rate cut to the borrowers, unless the major corporate borrowers clean up their books, there will be little incentive for further investments.

On its part, the Government is turning up the heat on the willful defaulters and the proposed bankruptcy law should help tackle the menace. Banking system can no longer be allowed to be exploited as a milch cow by the big daddies of the corporate world — the bane of the socialist era and, later, of the crony-capitalism post-reform times— and thus burden the taxpayers with a huge unpaid bill. The failure of the banks to fully pass on the rate cuts by the RBI only reveals their anxiety to recover some of the huge losses from NPAs, though it actually results in penalising honest borrowers and rewarding the defaulters. The RBI press note on Tuesday summed up its concerns most succinctly: A further monetary policy accommodation will be conditioned by the abating of recent inflationary pressures, the full monsoon outturn, possible Federal Reserve actions and greater transmission of its front-loaded past-actions.

Governor Rajan did not rule out a further cut but it would depend on prevalent conditions, especially inflation. Now the ball is in the government’s court. The RBI chief noted the start of the stalled infrastructure projects, though the corporate sector was still lagging behind. Should the Government press ahead with economic reforms and should the private sector grasp the opportunity to produce more at competitive prices despite the weakening global demand, the Central Bank would not be found wanting in playing its designated role.  Meanwhile, the generous 50 basis points cut accompanied by a wee-bit lowered growth projection for 2015-16, from 7.6 to 7.4 percent, might have somewhat dampened the spirits of  market men. Yet, the Sensex did register a gain of 161 points despite weak global cues. In the coming months, the focus should shift from what Rajan would do and turn, instead, to what the Government, and equally importantly, the corporate sector would do to avail of the opportunity afforded by a salutary rate cut.

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