Reserve Bank of India's monetary policy
To serious observers of Reserve Bank of India’s monetary policy, there are some non-issues interspersed between some new announcements. In the former category is the perennial speculation over a repo rate cut. This time, more than before previous monetary policy announcements, anticipating a rate cut was futile. With a surprise 0.25 percentage point rate cut effected just two weeks earlier, it was too much to expect the RBI to do an encore so soon.
Yet for some, who believe that a soft interest policy is a cure for all the economic ills, there was never a question of giving up hope before every policy statement. In this category are the financial markets. Note how, on February 3, an already volatile stock market moved ever so violently after it was known that there would be no rate cut. The irony is several analysts, including many from influential brokerages, had in their reports ruled out a rate action, believing that further rate cuts during the later part of the year to the tune of 0.75 percentage point are possible, perhaps even inevitable. The reduction in the Statutory Liquidity Ratio (SLR) by 0.50 percentage point to 21.5 per cent is a liquidity supporting move to an extent of about Rs.45 000 crore. However, it will not have any immediate impact as most banks have over invested in SLR securities. Traditionally, this route has been a safe haven for the public sector banks to park their funds rather than lend, an activity which carries some risks.
Transmission, a major worry
In the meantime, if anticipating a rate cut is usually a futile exercise, ensuring monetary transmission has been a serious issue always. It simply means that though there is enough liquidity and generally favourable conditions (such as inflation trending down), banks have not passed on the benefits to their customers through lower lending rates. However, sovereign and corporate bond yields have fallen by at least 50 basis points (0.5 percentage point) in the third quarter. The policy statement says that banks will have to match their rates sooner or later with the market rates.
Monetary transmission has assumed enormous significance in the context of falling credit off-take. Credit growth is down to an almost five-year low. Economic downturn and a pile-up of non-performing assets have added to the woes of lending banks.
Although not sufficiently highlighted, fear psychosis reigns supreme, and banks are reluctant to lend freely. This is an issue that has engaged the government and the RBI for far too long but unfortunately without tangible improvement. In most public sector institutions, especially banks, the most important person is not the CEO but the head of vigilance.
Important events ahead
Turning to the monetary statement, it is obvious that the RBI is waiting for three important events that are scheduled over this month. The Budget (February 28) will be analysed threadbare. After all, monetary policy and the fiscal policy will have to move in tandem to achieve macro-economic goals. It is not just fiscal consolidation — holding the deficit at the pre-stated goal (4.1 per cent of the GDP), but also the quality of such consolidation that will matter. The GDP data for 2014-15 as well as January retail inflation (CPI index) with the new base year 2011-12 will, along with the Budget, determine the direction and thrust of monetary policy. Of the three, the revised GDP data may not have an immediate impact — there are question marks over the methodology that has been adopted to restate the national income figures of last three years. The new CPI data will be watched carefully for inflation signals.
If the CPI-based inflation continues its present trend and the government sticks to fiscal consolidation, both quantitatively and qualitatively, the RBI may go in for a rate cut soon after the Budget and even before the next policy review date.
Of the developmental and regulatory announcements (Part B), the enhancement of the limit under the liberalised remittance scheme per person for fiscal 2015 shows the RBI’s confidence in the external account. The current account deficit is projected to be at 1.3 per cent of the GDP by March — a tremendous improvement over the difficult years when it hovered above 4 per cent and threatened to spiral out of control. For savers, the policy does not have any significant messages. The one announcement of note is to allow banks to book ‘non-callable’ deposits.
Subject to clarification, this is taken to mean that banks can take fixed deposits which cannot be closed prematurely. Depositors should get higher interest and banks the certainty of holding on to the deposits until maturity.
Details will follow, but deposits, which give tax savings under Section 80 C, cannot be prematurely closed but offer lower interest rates than what banks offer on normal deposits. The Budget may perhaps remove this anomaly.
The RBI has received 72 applications for Small Finance Banks and 41 for Payments Banks. The RBI-appointed committees will review the applications. The success of these niche banks will herald big changes in the financial sector.
crl.thehindu@gmail.com
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