The central bank has chosen not to throw any surprise, cutting the repo rate by 25 basis points, and maintaining a neutral policy stance. However, this neutrality already blurs into accommodative, given the vast quantities of liquidity injected into the system in the recent past and the permission granted to banks to count an additional two percentage points of their government bond holding under the statutory liquidity ratio mandate against the high quality liquid assets they are obliged to hold as a prudential measure — to be able to meet a surge in net cash outgo, as could happen in a panic when depositors demand their cash back — called the liquidity coverage ratio mandate. Banks would have additional resources freed up to lend, in consequence.
RBI expects growth to accelerate from last fiscal’s 7% to 7.2% in 2019-20, regardless of global slowdown and its effect on the country’s exports. The strongest predictor of growth has been a steady, seven-quarter rise in gross fixed capital formation, whose ratio to GDP in nominal terms had plunged below 30% and refused to regain lost ground during the last nearly five years.
Capacity utilisation still remains well below 80%. The only way for growth to pick up momentum is for banks to start lending again and for the government to revive public-private partnership (PPP) in infrastructure, incorporating the right lessons from the mistakes in PPP contracts of the past.
Inflation has been more muted, yet again, than RBI had expected in the past quarter. RBI has marginally lowered its inflation forecast for the coming quarters, making room for expectations of further rate cuts in the future.
A2014-15 Budget proposals to allow non-residents to buy and sell Indian government bonds via international central securities depositories is being activated. A task force to give life to the secondary market for corporate bonds is most welcome, as also a committee on facilitating greater securitisation of mortgages. These regulatory measures hold greater promise than mere rate cuts, given the rigidities in India’s credit markets.
This piece appeared as an editorial opinion in the print edition of The Economic Times.
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