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Rediff.com  » Business » Rate cut possible only if inflation eases: Rajan

Rate cut possible only if inflation eases: Rajan

Source: PTI
Last updated on: August 29, 2016 20:31 IST
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He said the short term macroeconomic priorities of the RBI continue to focus on bringing down inflation towards the government-set target of 4 per cent

Inflation projections are still at the upper limit of Reserve Bank's target and the policy rate can be cut only if inflation eases, outgoing Governor Raghuram Rajan said on Monday.

Retail inflation shot up to nearly 2-year high of 6.07 per cent, while the one based on wholesale prices soared to a 23-month high of 3.55 per cent in July.

"Inflation projections are still at the upper limits of RBI's inflation objective. With RBI needing to balance savers' desire for positive real interest rates with corporate investors' and retail borrowers' need for low nominal borrowing rates, the room to cut policy rates can emerge only if inflation is projected to fall further," Rajan wrote in the foreword to RBI Annual Report 2015-16.

He said the short term macroeconomic priorities of the RBI continue to focus on bringing down inflation towards the government-set target of 4 per cent.

So far, the RBI has followed a gentle glide path, aiming at 5 per cent by March 2017 after having brought it below 6 per cent in January 2016, Rajan said.

RBI is also working with the government and banks on speeding up the resolution of distressed projects and completing the clean-up of bank balance sheets; ensuring banks have the capital to make provisions, support new lending, and thus pass on future possible rate cuts, he added.

He said economic growth, while showing signs of picking up, is still below the levels that the country is capable of.

The key weakness is in investment, with private corporate investment subdued because of low capacity utilisation, and public investment slow in rolling out in some sectors, he noted.

The governor said willingness of banks to cut lending rates is muted.

"Not only does weak corporate investment reduce the volume of new profitable loans, their stressed assets have tightened capital positions, which may prevent them from lending freely," Rajan said.

The reluctance to lend to industry and small businesses is more visible among the stressed public sector banks compared to the private sector lenders, Rajan said.

The Governor said expectations of a good monsoon coupled with more money in the hands of government employees following the 7th Pay Commission payouts should boost consumer demand.

With final demand picking up, capacity utilisation is likely to increase, and so will investment.

"A virtuous cycle of growth is possible, reinforced by anticipation of the coming benefits from reforms like the recently passed Goods and Services Tax legislation in Parliament," he said.

On the Monetary Policy Committee, Rajan said: "This will be a welcome step forward in strengthening the transparency, continuity, and independence of monetary policy."

Rajan said the asset quality review initiated in early 2015-16 has improved recognition of NPAs and provisioning in banks enormously, with some banks taking significant steps in recognising incipient stress early.

"Now more focus should move to improving the operational efficiency of stressed assets, and creating the right capital structure so that all stakeholders can benefit," he said.

Rajan said in the medium term there is a need to increase efficiency in the financial sector through greater entry and competition.

"Participation is best enhanced not through subventions and subsidies but by creating supporting frameworks and new institutions that improve transparency, contract enforcement, and protections for market participants against abusive practises," he said.

RBI had asked banks to implement Charter of Customer Rights and appoint an internal ombudsman to monitor the grievance redressal process.

"We now will examine how banks are faring, and whether further regulations are needed to strengthen consumer protection," he said.

Rajan said, RBI will continue to increase specialisation of its staff, while strengthening the performance evaluation system so as to identify weaknesses, and the skilling system so as to provide remedial action.

Photograph: Paco Chuquiure/Reuters

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