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Why RBI should have cut rates

October 06, 2017 14:56 IST

A cut in rates would have encouraged the banks to lend aggressively on the retail front.

There was enough justification for the Reserve Bank of India (RBI) to cut the benchmark lending rates, feels former secretary of the Department of Economic Affairs in the Union government, Shaktikanta Das.

In a freewheeling discussion with Business Standard, a day after the RBI decided to hold the rates, he said: “the conditions are definitely very favourable for a reduction of interest rates”.

 

The secretary who has played a key role in the demonetisation programme of the government also refuted criticism that the Goods and Services Tax (GST) should not have been rushed in, given the current state of the economy.

Das has retired as secretary from the finance ministry on May 31, this year. This is the first time after his retirement that the secretary chose to speak publicly.

His views on rates are in sync with that of the finance ministry. On Wednesday, the ministry, in a sign of displeasure with the RBI decision to hold the repo rates unchanged, issued a terse statement noting the banks’ concerns on rising inflation.

Repo is the rate at which the central bank lends money to the banks. It sets the floor for banks to lend.

He explained that after demonetisation, the banks are flush with liquidity and consumer price inflation has remained low.

A cut in rates would have encouraged the banks to lend aggressively on the retail front.

It would have, in turn, led to a rise in consumer spending, which makes sense for the economy.

The higher credit would have revived demand in critical sectors like housing, Das added.

Indian banks have been struggling with excess liquidity since November 2016, after demonetisation poured currency deposits into their vaults.

“We should disincentivise lazy banking,” he said.

“Banks need to lend. They cannot offer the excuse of NPAs to shut off lending”.

The RBI’s latest data show bank loans to industry contracted by 0.3 per cent in August 2017.

It was worse than a contraction of 0.2 per cent in August 2016. This includes credit to major sub-sectors such as infrastructure, and basic metal and metal products.

According to him, the Indian economy faces no threat of a downgrade from the rating agencies despite the expected dip in the growth rate of gross domestic product (GDP) this year.

The RBI and a host of financial investors have reduced their estimate of India’s GDP for 2017-18. The RBI has lowered its estimate by 60 basis points. A basis point is one-hundredth of one per cent.

S&P has recently cut the sovereign credit rating for China, citing soaring debt, last month. It is a first since 1999. The downgrade is, of course, the second for China this year, after Moody’s did so in May.

But Das argued that the growth slowdown was short-term because of the huge range of structural changes brought about in the economy, in a very short time frame.

The former secretary also refuted the arguments about the sequencing of reforms undertaken by the current National Democratic Alliance government.

“After demonetisation, it was necessary to bring in GST rapidly, or we would have lost the benefits created by the former of moving to a more transparent system of doing business”.

Former finance minister and ruling Bharatiya Janata Party member Yashwant Sinha last week said the government had hurt the economy by rushing in the two, so close.

"We had already received a jolt by introducing demonetisation and then, the way the GST has been implemented, it worked as another blow,” he said in an interview to ANI.

On another note, Das said there was room for the government to reduce its shareholding in some of the banks.

“Not in all of them, but certainly some.” He refuted criticism that the Indradhanush scheme meant to refinance the banks had under provided for their needs.

S&P has in a report claimed that the plan “remained modest” and has doubled the projected requirement to Rs 1.9 lakh crore.

Photograph: Anindito Mukherjee/Reuters

Subhomoy Bhattacharjee in New Delhi
Source: source image