RBI goes by rulebook

THE RBI has become predictable and has stopped springing surprises. A quarter percentage point repo rate cut was a foregone conclusion. Only one of the six members of the RBI's monetary policy committee favoured a 50 basis point rate cut, one voted for maintaining the status quo, while the remaining four members prevailed. Rate cut expectations were raised by a record fall in retail inflation, a normal monsoon, subdued global oil prices, no immediate adverse impact on prices of the GST rollout and sluggish growth with manufacturing declining to its lowest level in eight years. 

Though eagerly awaited and highly commented upon, rate cuts have lost their previous appeal. As RBI Governor Urjit Patel has noted, banks have not yet fully passed on to customers the rate cuts announced in the past. That is because banks are in dire straits, thanks to an unbearable load of bad loans. A large chunk of the corporate sector is unable to pay back its loans. Telecom companies with a debt exposure of about Rs 1 lakh crore are set to add to the burden of NPAs, unable to withstand competition from Reliance. Secondly, demand for bank loans from the corporate sector has dried up. Even if interest rates are brought further down, there is not much reason to hope that cheaper credit would trigger a revival of private investment, growth and jobs. 

After demonetisation banks have more cash than they know what to do with it. Senior citizens and others dependent on interest income are facing the brunt. If the SBI has cut the savings rates, others too would follow soon. Jobless growth has left youth despondent. First quarter corporate results announced so far are far from encouraging. This cheerless mood on the economic front is in sharp contrast to the upbeat sentiment in the stock markets. The stock market boom is driven by excess liquidity. This mismatch can have its consequences. With the RBI doing its bit, the onus is on the government to do whatever it takes to boost manufacturing, sort out banks' issues and improve the overall business climate.