[Ed] [Eco] Lost opportunity

The RBI should have surprised us, yet again

Having cut the key repo rate by 25 bps to 7.75 per cent barely three weeks earlier, the RBI Governor has fallen back on the wait-and-watch game that characterised monetary policymaking in 2014. Although this may be in keeping with market expectations, the Governor ought to have moved ahead. The situation remains bleak in industry and infrastructure — the latest core sector output figures for December show a growth of just 2.4 per cent, while industrial growth for this year is a dismal 2 per cent. Yet, the possibility of turning things around seems brighter than ever. There are hardly any downside risks to lowering rates and getting investment off the ground besides reducing the cost of holding inventories. Retail inflation, at below 6 per cent, is well under the RBI target of 8 per cent for January 2015 and 6 per cent for next January. The rupee looks quite stable as of now, with the current account deficit at below 2 per cent of the GDP and ‘quantitative easing’ by the European Central Bank likely to lead to an increase in inflows. With the RBI, in fact, intervening in the currency market to keep the rupee from rising sharply, it could have considered another rate cut. The window of opportunity provided by low oil prices should not be frittered away, while it lasts. The Governor could have used this chance to push a further 25 bps cut and jump-start the economy whose investment intentions are still weak. Waiting for a decisive victory over inflation before making rate cuts runs the risk being behind the curve, notwithstanding the RBI’s keenness to avoid flip-flops or U-turns.

To be fair, the Governor has sought to revive private investment interest by slashing the statutory liquidity ratio – the proportion of deposits that bank need to invest in Government securities — to 21.5 per cent. That should release about ₹45,000 crore. But for this money to actually translate into investments on the ground, banks also need to shed their overhang of bad debt – an area where the central bank’s rhetoric against big ticket defaulters has not been matched by action. The SLR cut is also a clear signal that the Centre remains committed to fiscal consolidation and that the onus for revival will lie more in the hands of India Inc. Whether it is rate cuts or a reduction in SLR requirements, banks have been somewhat reluctant to lower rates and lend pro-actively. It is time for North Block to take stock of ecosystem issues in banking to ensure that monetary transmission improves, even as individual banks retain their operational autonomy.

To boost industry, infrastructure lending needs to be prioritised, for which a concerted institutional response, involving the banking sector, 3P India and Niti Aayog, is called for. The next Budget, just three weeks away, is expected to unveil a new policy architecture to put India back on the high growth path. Monetary policy, they say, is all about timing. That rings particularly true at this point in time.