The Hindu Business Line

Ahead of polls, Govt turns to RBI for a much-needed boost


The Union government is increasing­ly looking to the Reserve Bank of India to help boost a flagging economy before an election that kicks off next week. And new Governor Shaktikant­a Das is turning out to be a willing partner.

He is set to deliver a second consecutiv­e 25 basispoint interest rate cut on Thursday, according to most economists in a Bloomberg survey, reversing two hikes made by his predecesso­r Urjit Patel last year. Since taking over at the RBI in December, Das has relaxed restrictio­ns on weak staterun banks to help spur borrowing, and allowed lenders to restructur­e loans to small- and medium-sized businesses that are in default.

Excess capital

An RBI panel is also considerin­g a government request to transfer more of the central bank’s excess capital to the state. An increase would help plug a widening budget deficit, allowing Prime Minister Narendra Modi to fund billions of rupees in spending to rural workers, a key voting bloc.

“The new governor is seen as more amenable to the government’s wish to keep policy loose and boost growth,” said Shilan Shah, senior India economist at Capital Economics Ltd in Singapore. Headline inflation is low and that gives the RBI room to cut, which, coming as it would just before an election, should provide a boost to sentiment.

Lower food prices have put a lid on inflation – and even though price gains accelerate­d to 2.6 per cent in February from 2 per cent in January – they remain well below the RBI’s mediumterm target of 4 per cent. The RBI expects inflation to stay below that threshold until the end of the year.

Weak consumptio­n

While the core inflation measure, which strips out volatile food and fuel prices, has been sticky above 5 per cent, that may also start to inch lower as the economy slows, providing the RBI with more justificat­ion to cut interest rates.

Benign inflation has brought into sharp focus India’s high real rates of interest, RBI Governor Shaktikant­a Das is more amenable to the government’s wish to keep policy loose and boost growth

which economists say can hold back investment growth in the economy. Private consumptio­n has already taken a beating on the back of a crisis in the shadow banking sector, and recent high-frequency data point to a bumpy ride for the economy ahead.

On Monday, the RBI took another step to help spur lending, tweaking rules relating to the disclosure of bad loan divergence­s at banks, which would support lenders struggling to contain stressed assets.

The economy needs to have grown just above 6 per cent in the January-March quarter to meet the government’s estimate of 7 per cent

expansion for the 2019 fiscal year that ended on March 31. That’s well below the 8-plus per cent growth seen in the April-June quarter.

“Our India current activity indicator is suggesting some slowdown in the near term,” said Prachi Mishra, chief India economist at Goldman Sachs Group Inc in Mumbai.

Growth in India based on the current activity indicator was reported at 6.6 per cent in February, down from 6.7 per cent in January, and almost 1 percentage point lower than the early 2018 pace.

Data on Tuesday showed a loss of momentum in manufactur­ing activity. The Nikkei India Manufactur­ing purchasing managers index for March fell to 52.6, the lowest in six months, on the back of softer sales. Factory orders and production expanded at the slowest pace since last September while job creation eased to an eight-month low. A reading above 50 signals expansion.

The slowdown is a setback for Modi, who was swept into office in 2014 on the back of pledges to reform the economy and create 10 million jobs each year, a promise that saw him win over India’s youth.

Das is doing his part to stimulate activity, but there are risks to some of those plans, particular­ly his willingnes­s to allow weak staterun banks to lend again, which contrasts with his predecesso­r’s efforts to slowly nurse struggling lenders back to health. Das’s decision risks renewing a build-up of bad loans.

“The rapid exemption of state-run banks from the prompt corrective action suggests that Das risks swinging the pendulum too far to the other side,” said Priyanka Kishore, head of India and South-East Asia research at Oxford Economics Ltd in Singapore.

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