Credit Policy: Is it a hit, miss or well left?

For the already available beneficial impact of liquidity on cost of funds, RBI’s stance of no cut would have seemed harder on the economy.

The Credit Policy always stirs interest on three counts: its policy stance, its rate action, its proposals on credit and liquidity.

While monetary policy actions in the western world strive to inflate and grow, in India RBI has been seen balancing inflation and growth, in that order. On headline inflation we have done pretty well mostly thanks to softness in food and commodity prices. There has been a worry though that core inflation is sticky and upside risks to commodity prices, particularly crude prices, remain.

These factors have to be weighed against muted demand, slow growth and lacklustre investments. The market was split with some expecting a dovish pause and some a hawkish cut. In the event, RBI left rates unchanged nuancing their policy stance to “neutral” from “accommodative.”

The tweaking of stance to “neutral” is this policy’s headline and is being seen as reducing the chances of a future rate cut. The other interesting highlight is RBI’s formula for transmission of policy rate to banks which lays stress on bank NPA resolution, recapitalisation of banks and making small savings rates responsive to Government market borrowing rates.

On the liquidity front, India has witnessed a sea of liquidity at banks courtesy DeMo, taking the excess liquidity in the system to a staggering 2 lac cr appx.

In fact these days banks do not borrow from RBI but are lenders to RBI, effectively making reverse repo 5.75% as the base for funds rate and not the repo rate of 6.25% . Repurchases of GoI securities by RBI to inject liquidity have been rendered redundant. In the last 2 months, the 10 year debt yields have come off by 50 bps and the benchmark SBI MCLR came down by 90 bps.

What could not be fully achieved by persuasion has been achieved by demonetisation. But for the already available beneficial impact of liquidity on cost of funds, RBI’s stance of no cut would have seemed harder on the economy. That having been said still a rate cut would have augured well for sentiments and for MSME and as we all know sentiment drives growth and investments!

On policy stance the RBI has kept within broadly expected growth, adjusting GVA to 6.9% revised from 7.10% and for FY18 it is expected to accelerate to 7.40%. Inflation is projected around 4.5-5% in F 18. Both indicators reassure that growth and inflation will remain broadly balanced.

To employ imagery of cricket, some may say Dr. Patel left the ball but we do hope it is padding the delivery to go for a later drive!

(The author is CFO, Mahindra Group)