By Rasananda Panda
If the Budget for FY17-18 was expansionary in nature in the form of all kind of grandiose announcements towards increasing public spending in infrastructure sector then the sixth bi-monthly credit policy as announced today by RBI looks other way around as it is evident from its neutral stance on keeping the policy rate i.e. repo rate unchanged where as the dominant opinion leading to this credit policy was towards reducing the repo rate by 25 to 50 basis points.
The RBI while announcing its credit policy today maintained that the factors that made them to keep the repo rate unchanged are the chances of rising inflation to 4.5 to 5 percent by October, 2017. This is in contrast to what the FM has announced in the Budget 2017-18. The credit policy acknowledges the risk of likely increase in crude and metal prices arising out of geo-political complexities, risk of demand going up for vegetables and other food items etc. in the aftermath of easing of demonetisation in the months to come where the supply of such commodities will be less given the seasonal nature of the demand. Add to it is almost certainty towards increase in US Fed rate later during the year. The full blown impact of seventh central pay commission implementation will add fuel to the fire of inflation. The RBI is also is of the view that such factors that may lead to increase in CPI inflation shall be transient in nature and may peters out going ahead later in the year but one squarely doubts the basis of this assertion by RBI. This, when juxtaposed, with the FM's brevity towards controlling fiscal and revenue deficit during the year seems little bit perplexed. The currency fluctuations that are likely to happen once the Fed rate increases will simply make the interrelationship between inflation-exchange rate and fiscal deficits more vicious and therefore, the projections towards growth rate of GDP or even GVA as made by FM in his Budget or even by RBI appears to be not that convincing.
The credit policy also acknowledges that the impact of demonetisation will be more felt as the economy enters into April-June quarter. In fact, this and the next quarter of the FY 17-18 will reflect the actual impact of the demonetisation when the economy will be in the summer and monsoon period when the economic activity is usually less. This when looked from the move towards remonetisation in the months ahead as announced by RBI in the form of allowing unlimited withdrawal from the savings bank etc. are going to play an important role in assessing the impact of demonetisation on the economy in toto.
The credit policy statement also send messages to banks towards further cutting their lending rates as it asserts that over the last one year or so against a reduction of 175 basis points in repo rate the banks have passes only 85-90 basis points to the customers which the banks should voluntarily reduce independent of repo rate cut by the central bank. Rather, the commercial banks should develop the agility towards adjusting their lending rates automatically for next one or two quarters given that they have windfalls in the form of deposits arising out of demonetisation and now the banks should find ways towards deployment of these low cost deposits in most prudent manner and compensate for their earlier losses. Add to this, the move towards recapitalisation as announced by FM in his Budget looks good for the banks going ahead.
However, all said and done, will this credit policy promote private investment and spur the growth of manufacturing sector that is otherwise slowed down during last 4-6 quarters ? Perhaps not. There is nothing in this credit policy that reassures domestic investors either in the money market or in capital market. It seems that the Indian economy for a good part of 2017-18 will now unfold to the international geo-political developments and none the less to the political rhetoric post the announcement of UP election after 11th March given the scope for formal policy options in the form of Budget and the credit policy are now over.