If RBI wants to really push credit in the economy, instead of throwing more money at risk-averse, loan-shy banks, it should lend directly to non-banking financial companies that lend to small and medium enterprises and buy the bonds of large companies.
The decision of RBI’s Monetary Policy Committee (MPC) to keep policy rates unchanged and stance accommodative, despite a rise in inflation, transient, it would appear, is welcome. Both the repo rate and the reverse repo rate remain unchanged at 4% and 3.35% respectively. The Purchasing Managers’ Index for services has been contracting for three months. Bank credit growth has been negative over this financial year so far. Even as RBI continues to push liquidity, the daily absorption of liquidity through the reverse repo window has been climbing, from Rs 5.7 lakh crore in June to Rs 8.5 lakh crore in the first week of August so far. If RBI wants to really push credit in the economy, instead of throwing more money at risk-averse, loan-shy banks, it should lend directly to non-banking financial companies that lend to small and medium enterprises and buy the bonds of large companies.
Inflation is likely to stay below 6% by the end of the year, as supply constraints are eased and a favourable kharif output arrives. But there must also be fiscal action, that the RBI governor has alluded to, to alter the economy’s growth prospects. So, the government should step up investment and other fiscal measures — such as cutting duties on petro-products — even as RBI keeps the interest rate unchanged to revive growth. Sovereign bond yields have softened across advanced economies as markets seem to have accepted the views of central banks that inflation is transitory, at least for the time being. However, bond yields remain high in emerging market economies on inflation concerns, says RBI. Inflation in India is not due to excess demand, and any premature monetary tightening would hurt growth and exports, even as global trade picks up.
RBI has also increased the size of its variable-rate reverse repo auction to absorb liquidity. The problem is not deficiency of liquidity, but the reluctance of banks to lend. That must change. RBI has retained the forecast on real growth at 9.5% in 2021-22. Fiscal action is needed to realise it.