Not by Rates of In­ter­est, Says RBI

Re­viv­ing in­vest­ment calls for po­lit­i­cal ac­tion

The Economic Times - - The Edit Page -

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.

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