All eyes on the upcoming monetary policy on the 29 September as the market awaits to see the Reserve Bank of India’s next course of action.
He came, he saw…took action
Back in 2013, when Rajan took over as the Governor of RBI, his agenda was clear. He was all set to bring about stability into financial markets, look at financial inclusion and support the Indian rupee amongst others. The Indian rupee had heavily depreciated against the US dollar, and Rajan announced a series of fire-fighting measures to combat this situation. He announced swap windows for foreign currency non-resident (bank) deposits and overseas borrowings by banks, resulting in capital inflows of over $34 billion. Today, the rupee has benefited, thanks to strong inflows in the equity and debt markets and low oil prices.
Not just that, in order to tackle the problem of growing bad loans in the banking sector, the RBI came up with ways to accelerate the working of Debt Recovery Tribunals and Asset Reconstruction Companies and take steps accordingly. “Finance is not just about lending, it is about recovering loans also. We have to improve the efficiency of the recovery system, especially at a time of economic uncertainty like the present. Most immediately, we need to accelerate the working of Debt Recovery Tribunals and Asset Reconstruction Companies,” the Governor had then said. Some measures included coming up with the joint lenders’ forum, set up to revitalise distressed assets and giving more time to banks to restructure their distressed loans. Despite best efforts, Indian banks are still facing mounting pressures on their non-performing assets.
Interest Rates and Inflation
As soon as he took over, Rajan went on with hiking the policy rate, in his first policy review, to combat inflation. Wholesale price index (WPI) inflation had touched 6.1 per cent in August 2013 and consumer price index (CPI) stood at 9.52 per cent then. He then said, “What is equally worrisome is that inflation at the retail level, measured by the CPI, has been high for a number of years, entrenching inflation expectations at elevated levels and eroding consumer and business confidence.”
While the central bank stayed hawkish for the whole of last year, it decided to slash interest rates thrice this year. Rajan also urged banks to slash lending rates following the rate cuts. Leading banks such as State Bank of India, ICICI Bank, HDFC Bank promptly reacted by doing the needful. Currently, the repo rate stands at 7.25% and the reverse repo at 6.25%. Today, CPI or the retail inflation has declined to 3.66 % in August, last month. Rate hikes, coupled with a slow growth in the economy and fall in global commodity prices has paved for a fall in the inflation numbers.
Rajan had also noted, exactly a year ago, in his policy statement that, “The future policy stance will be influenced by the RBI’s projections of inflation relative to the medium term objective of 6 percent by January 2016, while being contingent on incoming data.”
Last week, the US Fed Reserve decided not to raise interest rates, which led to a sharp rise in the stock markets and the rupee touching a one-month high at 65.17 to the dollar.
Certainly, it is a tough decision on the rate cut front. Given poor monsoon this year, it could lead to a spike in food prices, which will weigh on the central bank. Most market participants are of the view that there could be a cut of a 25 basis points to give a boost to investment in the country. Inflation is below the central bank’s estimated trajectory, and other factors such as a fall in the global crude oil prices and a slowdown in demand, also call for a rate cut.
The central bank has not ruled out a possibility of a rate cut, if the economic data suggests a need for a rate cut. Let’s wait n watch!
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