Financial Scene C.R.L. Narasimhan

Don’t ignore depositors

The usual speculation as to whether the Reserve Bank of India will cut its repo rates sooner rather than later is reaching a feverish pitch. Many market participants, who have a vested interest in a softer interest regime, have been quoted by the financial press as saying that a rate cut will happen most probably during this month itself. The current repo rate is 7.25 per cent and the expectation is for a 0.25 percentage point cut to take it down to 7 per cent.

The RBI has scheduled its next monetary policy review for September 29 and this will be followed by another one on December 1.

While obviously chances of a monetary action are higher during a scheduled review, the central bank has not been averse to acting outside the scheduled rates.

It is unfortunate but true that the two camps — one for an immediate rate cut and the other for a graded approach — are seen to be presenting two diametrically opposite views. Such a clear cut division is certainly not warranted and in any case does not obtain in the real world.

The main reason why such a dichotomy exists in monetary policy formulation is that those who believe that a softer interest rate regime, think that it to be a panacea for all known and unknown economic ills while the other category will have to reckon with other macro economic concerns.

This in turn is being portrayed as pro-rate cutters versus the RBI, represented notably by its Governor.

There is very little to suggest that the RBI is loath to cut rates till it becomes absolutely necessary. Much of the recent utterances of the Governor have been rooted in macro economic concerns, which are amply supported by hard economic data. It is interesting, but, he has not totally ruled out a cut in the repo rate. Rather, he would like the RBI to get a firmer grip over consumer price inflation, which has become the policy reference point. The recent turmoil in the global financial markets caused by problems in China is another reminder that one cannot be too cautious. The orthodox stance in the face of such unprecedented turmoil is to maintain the status qua at the very least.

Global markets

For, China’s problems have morphed into a crisis affecting India and other emerging markets as well. The most important consequence has been an increase in risk aversion on the part of global funds which might mean a reverse flow of capital to the U.S. and other developed countries. The rupee has fallen and the stock markets have tumbled accompanied by great volatility. India might still be a bright spot among emerging market countries and a few developed ones but it is still not time to do away with a cautious approach that has served well.

Sane utterances

In the Annual Report 2014-15 released during the last week of August, the RBI has once again stressed the importance of reforms to spur economic growth. The report pointed out the consumer price inflation was in the higher end of the Bank’s projections for January. There are structural concerns to growth and the banking system faces serious problems in the matter of non-performing assets (NPAs). The tenor of the Annual Report has been interpreted to mean that there will be no immediate monetary easing. Such facile interpretations can be very wrong.

The RBI Governor has said in some informal meetings that he was not averse to a rate cut. In other words, there is no dogma that guides the country’s monetary policy.

In any case, the Annual Report is a report of the RBI’s board of directors to the Central Government. While it does cover the macro-economy, its accent is on its internal working of final accounts of the country’s central bank as it were. It is not meant to be a dissertation on the monetary policy.

However, it has made some important points which lend weight to a discussion on rate cuts. For instance, it repeats the point made in previous credit policies: big banks have been unwilling to pass on previous rate cuts (0.75 percentage points) and this has delayed monetary transmission. Until the transmission is complete further rate cuts will be ineffective.

Banks, however, have their own reasons for not lowering their commercial lending rates. There has to be a correlation between deposit rates and lending rates. The former will take sometime to come down.

Another data which supports the case for lower interest rate comes from the recent CSO data on GDP growth for the first quarter of the current fiscal year. At seven per cent, it is lower than expected. Immediately the cry for a rate cut has become strident, but there has to be a more nuanced approach.

The current GDP data methodology has still not found acceptance across the table. Even to an average reader it is very confusing.

Here could be more substance to the argument that India has to reckon with deflation in many countries.

There are many points for as well as against a rate cut. But one constituency which has been ignored are the depositors, especially those who depend on bank interest for their livelihood.

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Printable version | Oct 17, 2021 4:38:02 PM |

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