SN Misra
After its flaccid war for independence, the RBI has decided to retain repo rate, despite clear pointers that inflationary momentum is easing. It has revised the inflation forecast from October 2018 to March 2019 from 3.9-4.5 per cent to 2.7-3.2 per cent. The main reason for this is the considerable softening of price of food and petroleum products. The rupee has also become more stable.
Brent crude spot rate, which reached $85 per barrel, has now dipped by 28 per cent to $61.8. Oil bill accounts for 25 per cent of the total import. Oil bill rose from $70 billion (2016-17) to $87 billion (2017-18) owing to 25 per cent hike in crude rates. If the present drop persists, India will save $10 billion from October 2018 to March 2019.
GDP growth rate is also upbeat and likely to be 7.3-7.4 per cent for 2018-19. The World Bank report also believes the effect of demonetisation has petered out and the impact of GST has stabilised substantially. However, the most definitive signal of the proactive approach of RBI is its move to ‘improve liquidity in the banking sector, NBFCs and housing finance companies’. RBI Deputy Governor Viral Acharya has observed that liquid deficit, which stood at over Rs 130.36 billion during mid-September due to the fallout of mutual fund redemptions and concomitant rollover risks for MBFCs and HFCs has now fallen to Rs75.3 billion. It is reassuring that such Open Market Operation (OMO) purchases by the RBI would continue till March 2019. The RBI has duly noted the concern of the members of the RBI Board to improve liquidity in the system.
The other edifying step that the RBI has taken is to reduce the SLR (Statutory Liquidity Ratio) by 25 basis points every quarter, until it reaches 18 per cent of net demand and time liabilities. It now stands at 19.5 per cent. This will free up about Rs 1.5 lakh crore from ‘financial repression’ of having to park their deposits in treasury bills at 7.1-7.5 per cent, instead of lending to borrowers at commercial rates of 12.5-13 per cent. By infusing greater liquidity into the system, by selling off government bonds through OMOs and calibrated reduction of SLR, the RBI has given a clear signal to the market that it cares for increased liquidity in the banking system.
Without access to formal credit, employment opportunities and with extremely low level of primary education and healthcare support, the majority of Indians do not become part of this monetary ritual that the RBI indulges in
There is one contentious area where the RBI has always been at loggerheads with banks — non transmission of repo rate cuts to the same extent by PSBs. This is likely to be resolved as the RBI has now decided to link all new floating rate loans to an external benchmark. This would mean if the external benchmark is the repo rate, which is 6.5 per cent, then the floating rate would be 8.5 per cent, assuming a spread of about 2 per cent. At the moment, SBI charges 8.7 per cent to 9.25 per cent, while ICICI charges 9 per cent to 9.25 per cent. MSME, home and car loans are likely to benefit from the new floating rate system. The RBI has also permitted non-residents to participate in rupee interest rate derivative market. The wider and deeper this market, the better is its ability to deal with currency fluctuations.
The RBI is justifiably wary of the residual impact of MSP. The government has increased the scope now to 14 items where MSP will be based on cost of production plus 150 per cent markup. This has potential for food inflation. The RBI is also worried about fiscal slippages, as the government has almost reached its limit of 3.3 per cent, Fiscal Deficit to GDP ratio, that is, Rs 6.24 lakh crore. Its deficit during 2017-18 was 3.5 per cent of the GDP. Besides, non-fuel retail inflation has risen to more than 6 per cent, which is the upper limit of the glide path for inflation, fixed by the Urjit Patel Committee. It has wisely decided to retain a policy of “calibrated lightening”, before reverting to a neutral stance, as advocated by Professor RM Dholakia, a member of the MPC.
Last month, there was a shrill debate regarding revisiting the GDP numbers. By employing back series data, an effort was made to demonstrate how the average growth rates during UPA rule was 7 per cent and how the present regime will achieve 1 per cent more than that. Professor Joseph Stiglitz, the Nobel Laureate, in a stinging riposte has brought out how it is more important to know whether the well-being of citizens has improved. Drawing reference to a report by ICMIPCP in 2008 “Measuring our Lives: for GDP does not Add up”, he brings out why it is wrong to focus only on material well being, rather than health, education and the environment.
In India, too, the discussion on GDP growth clearly overlooks human development. A study by NABARD brings out how the average indebtedness of the rural poor is about Rs 1 lakh a year. Kisan Credit Cards, which give farmers access to loans, is available only with 3 per cent of farmers. Without access to formal credit, employment opportunities and with extremely low level of primary education and healthcare support, the majority of Indians do not become part of this monetary ritual that the RBI indulges in. Yet it is assuring to note that food inflation and fuel prices have finally been reined in though the absurdly low prices is playing havoc with farmers in Nasik, who sell it at Re 1 a kilo, while it sells at Rs 20 to Rs 22 a kilo in Odisha. Keynes has termed such situations as ‘poverty in the midst of plenty’. The Indian economy has produced islands of prosperity in the middle of an ocean of poverty.
The writer is Dean, KIIT School of Management. e-Mail: misra.sn54@gmail.com.