oppn parties Monetary Policy, Cost Of Funds And Growth

News Snippets

  • PM Modi tells BJP workers that India is in for a long battle against the coronavirus and there is no scope to feel tired or defeated
  • PM Modi asks ministers to focus on exports and new areas and sectors
  • PM Modi asks ministers to prepare business continuity plan post the lifting of the lockdown
  • Corona cases in India cross 4000 and the death toll stands at 124
  • The government decides to double the testing of corona suspects from 10000 now to 20000 in the next three days
  • Flipkart assures employees that there will be no job or salary cuts due to the COVID-19 pandemic
  • Although it was obvious, but the government still clarifies that there is no need to switch off appliances and only lights need to be switched off on April 5 at 9pm after confusion in the minds of some people
  • PM Modi and President Trump decide "to deploy full strength of (Indo-US) partnership" to fight against COVID-19
  • 17 states have reported 1023 cases of coronavirus linked to the Tablighi Jamaat, which translates to 30% of all positive cases in India
  • The government says people should not use alcohol-based hand sanitizers before lighting diyas or candles on April 5
  • The railways say there is no certainty yet when services will resume after the lockdown and a final decision will be taken in the next few days
  • As coronavirus cases multiply in Assam, six north-east states seal their borders with the state
  • Power System Operation Corporation Ltd. (POCOSO) putting all systems and protocols in place at war-footing to ensure there is no grid failure due to reduction in demand on April 5 at 9 pm
  • Power ministry scotches rumours that the power grid might fail due to the 9-minute blackout called by PM Modi on Sunday, April 5
  • Centre asks people to wear home-made masks if it is absolutely essential for them to step out of homes
26 nurses and 3 doctors test positive for COVID-19 at Wockhardt Hospital in Mumbai, facility cordoned off, no entry or exit permitted from the hospital
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Monetary Policy, Cost Of Funds And Growth

By Sunil Garodia
First publised on 2020-02-13 12:38:10

About the Author

Sunil Garodia Editor-in-Chief of indiacommentary.com. Current Affairs analyst and political commentator. Writes for a number of publications.

In its February bi-monthly meeting, the Monetary Policy Committee (MPC) of the RBI decided to hold rates while maintaining an "accommodative stance". This was expected as inflation had climbed way above the 4% considered 'normal' by the MPC. Despite regular rate cuts for the last few quarters, growth has refused to pick up. Neither has relatively cheaper credit led to an increased demand for funds. Although the banks have not fully passed on the rate cuts to consumers, the demand for funds is not only dependant on cheap or cheaper funds. There is stagnancy in demand for goods and services in the economy and unless that picks up, entrepreneurs will not plan to invest in new projects or increase the capacity of existing ones. The RBI's decision not to further reduce the repo rate in this meeting was vindicated in a couple of days when it was reported that retail inflation had shot up further to stand at 7.59% in January, the highest since May 2014.

But since spurring growth is a prime concern now, the RBI has unleashed other weapons in its armoury to relieve the banks by making the cost of finance cheaper for them on the one hand and provide them with liquidity so that they can lend more, on the other. Banks have been exempted from providing for cash reserve ratio (CRR) on fresh retail loans disbursed after January 31 to purchase vehicles and homes, and to MSMEs. While this will make the cost of funds cheaper for banks and will channel funds in segments that can spur demand, unbridled and seemingly lucrative (for banks) retail loans can well assume the dimensions of a bubble. Banks have to guard against this.

Then, the RBI has introduced one- and- three-year term repos for a total amount of Rs 1 lakh crore through which the banks can borrow funds from the RBI at the existing repo rate of 5.15%. This will also reduce the cost of finance for banks as they now borrow at a rate between 6-6.5%. While this will make banks secure, it remains to be seen how much of the rate differential they pass on to the consumer. The RBI move had an immediate effect in lowering interest rates in the bond market which went down by 10 to 15 basis points in a matter of minutes after the announcement.

But the problem being faced by the economy is not going to be addressed only by making credit cheaper or infusing liquidity in the system. By all accounts, banks are already flush with funds. Lending is not taking off because there is either no demand or the banks are not interested to lend to the few who do need money. This is either because the projects do not inspire confidence or the bankers have still not got over the fear factor despite changes in the rules and prodding by the finance minister. Retail loans are also not growing at the expected rate because businessmen-borrowers do not want to extend themselves in the face of falling profits in their own businesses and the salaried class is worried about job cuts, delayed or no raises and smaller bonuses. Despite all the right boxes being ticked by both the government and the RBI, things will change only when the sentiment improves. The scary part is that no one knows how and when will that happen.