Asks banks to be discerning in their loan decisions and ensure adequate credit flow to productive sectors of the economy

Even as the Reserve Bank of India (RBI) addressed the rising growth concerns by reducing the key rates, it yet again reiterated its often-articulated demand for a “strong and effective supply side response” to bridge the gaps in the infrastructure area, and correct structural imbalances in the economy, especially in key food articles.

Asserting that a “credible and comprehensive” fiscal adjustment by the government was critical in this regard, the apex bank reinforced its call for structural reforms. The approval process had to be hastened, and the governance improved to inspire trust among investors.

“The RBI, on its part, will have to calibrate monetary policy to the evolving growth-inflation dynamics, and the management of the twin-deficit risks,” D. Subbarao, Governor of the Reserve Bank, said while releasing the Third Quarter Review of Monetary Policy 2012-13. In this context, the Governor made it clear that the economy needed new investment ‘most urgently’.

The Governor also listed a number of major risks to the management of the economy. He was particularly worried that the widening current account deficit (CAD), read in tandem with the huge fiscal deficit, could expose the economy to “twin deficit risks”. While financing CAD with risky flows could push the economy into further vulnerable zone, the fiscal deficit could crowd out private investment and “stunt growth impulses,” the RBI felt. The apex bank said the global risks remained ‘elevated’. These had the potential to spill over to the Indian economy, it warned. It underscored the urgency in removing supply constraints, and clearing the negative investment climate.

The RBI admitted that the “risk aversion in the banking system stemming from concerns relating to growing non-performing assets is constraining credit flow”. It, however, asked banks to be discerning in their loan decisions and ensure adequate credit flow to productive sectors of the economy.

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