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Reserve Bank of India (RBI) Governor Shaktikanta Das is spot on when he says premature withdrawal of liquidity would hurt growth. After all, economic recovery is still fragile and not yet broad-based. The way forward is to policy-induce increased public investment and bigticket infrastructure projects, to proactively crowd in private investment, so as to shore up the growth momentum. The fact that only 50% of the guaranteed emergency credit line offered by the government for companies has found takers shows that credit availability will not, by itself, induce growth. In tandem, we need to engineer an active corporate bond market to fund infrastructure.
Institutional investors and foreign portfolio investors (FPIs) have scant appetite for lower-rated assets including greenfield infrastructural investments. So, put in place a credit enhancement fund, specifically for the infrastructure sector, for partial guarantee of bond payments in a credible regulatory framework. Also, usage of corporate bonds in RBI’s liquidity adjustment facility (LAF) should help rev up an active and vibrant bond market, as would exchange-based corporate bond repos. The fact is that many developing and middle-income economies have bond market sizes in excess of 30% of GDP; there’s no reason for India’s bond market to remain barely 17% of GDP. Recent RBI moves to overhaul market design in credit default swaps is forward looking indeed.
Central public sector undertakings (PSUs) have an annual capital expenditure of over Rs 1.5 lakh crore, which surely needs to witness quicker coagulation of funds on the ground. By keeping its policy rates unrevised and monetary policy accommodative despite supply rigidities spiking consumer price inflation to 7.6% in October, RBI is clearly hoping to revive growth amidst economic contraction.
This piece appeared as an editorial opinion in the print edition of The Economic Times.