Sustained low inflation necessary for lower cost of funds: RBI

Ahead of the bi-monthly monetary policy review, the Reserve Bank of India (RBI) Deputy Governor Urjit Patel on Thursday said sustained low inflation over medium- to long-term is necessary to bring down the cost of fund.

“Sustained low inflation... at a low enough level is an important ingredient for making the cost apposite to that particular level of inflation and inflationary expectation.

“It’s not inflation last week or last month but its medium- to long-term inflation,” he said.

Inflation, which RBI takes into account while deciding the interest rate, has remained low for the past several months.

While the wholesale price index (WPI) remained in negative territory for 10 months in a row, the retail inflation (CPI) eased to 3.66 per cent in August.

The RBI is scheduled to announce bi-monthly monetary policy review on September 29.

In the last policy review on August 4, the RBI had kept its policy rates unchanged because of elevated inflation level.

Besides, Mr. Patel added, fiscal deficit of both the central and state governments also play an important role in determining the cost of fund as the Centre and States combined together are the largest borrowers in world over.

“The other is credible programme of fiscal rectitude by the government...both the central and state governments can help... and the reason is they are in direct competition with other long-term borrowers,” he said, adding the largest borrower across the world is the government. The Deputy Governor also said that higher cost of restructuring pushes the cost of fund and RBI was trying to address this issue.

“The higher the cost of restructuring, the higher the cost of debt workout, the more it builds in the cost of capital from the side of the lender, and this is something we are in middle of addressing,” he said.

In addition, he said a competitive, vibrant banking system is important for lowering cost of capital, and a lower taxation too is helpful.

As part of efforts to deepen financial inclusion, RBI yesterday granted small finance bank licences to 10 entities.

“We announced licences for small finance bank with focus on small borrowers. So, this addresses niche requirement that is there to be addressed for ‘Make-in-India’ for creating entrepreneurial numbers to create one million jobs per month,” he added. —PTI