Not by Rates of Interest, Says RBI
Reviving investment calls for political action
The Reserve Bank of India’s (RBI) decision to hold its policy rates, rather than to slash them by a quarter of a percentage point, as had been widely expected, is justified. The chief reason is volatility emanating from global developments. The US has started to withdraw from its extra-easy monetary policy, raising rates once and expected to follow through several times later this year. Oil prices are moving up once again, as also other commodity prices. If higher yields in the advanced markets induce some relocation of capital to these markets from emerging markets, that would weaken emerging market currencies, including the rupee. That, by itself, would feed into inflation by raising imported energy and other commodity prices. Add rising crude prices, and the effect would be magnified. Clearly, this is not the time for the RBI to widen the interest-rate differential between India and the US, inducing further outflow of footloose capital. The RBI expects growth to be lower this fiscal as well as in the next, as compared to previous estimates, thanks to demonetisation. Even the present lower estimate assumes the monsoon would be normal. That remains to be seen. However, the failure, so far, to tackle the huge and still mounting burden of bad debt on the banking system would make the banks reluctant lenders and Indian industry, reluctant borrowers. Lowering rates will not alter this reality. So, the central bank is perfectly justified in its implicit assumption that it is not the high cost of money that holds back investment in the country, which, at 26.5% of GDP, is lower than in any year since 2004-05. With the ongoing criminal investigations into banking decisions, no banker will want to be accused of having sold off his loan portfolio too cheap and will resist sale of bad loans to an asset reconstruction company.
Only informed, and firm, political action can kick-start investment and lending in the system. And that is beyond the central bank’s remit. It is up to the Union government and the political leadership to do what is required to revive investment in the economy.