IMC President Ashish Vaid’s view on RBI’s Third Monetary Policy
by Shrutee K/DNS
Primary aim of the MPC is
to boost growth through fiscal and monetary stimulus and RBI has acted
decisively and on time. RBI has retained the
‘Accommodative stance’.
In an unconventional
measure of using the rate parameters in multiples of 25, the cut in the repo
rate is by 35 bps and reverse repo to 5.15 %.
Rate cut has been the flavor of season with most central banks heading
south on policy rates, notably FED in US. Transmission by banks had been
‘patchy’ in the past. Now with comfortable liquidity position of Rs 2.13
trillion as on 5th Aug in the system, it is expected banks will
start the transmission process quickly.
The GDP growth for
2019-20 is also revised from 7.0% to 6.9% on the reflection of slowdown in
consumption demand, government spending and lack of quality jobs – all which
has contributed to the slowdown. Slowdown can also be attributed to long list
of domestic and international challenges.
IMC opines that rate mechanism is just one part of the credit management
solution in the economy. RBI could also look at “credit less” growth as was
analyzed by IMF in 223 recovery episodes,
shouldered by ‘consumption sector’. by strengthening employment and wage
growth in rural and urban labour
markets.
IMF also had lowered the
country’s GDP growth from 7.3% to 7% citing weaker than expected demand. RBI expects to boost aggregate demand,
especially private investment.
CPI Inflation projected
at 3.1% for Q2 FY 20 and between 3.5 to 3.7% in HY FY 20 which is well within
the target of 4%.
Interest rate on home
loans and auto loans are expected to be reduced by the banks. The move will
also help credit growth in the banking system.
While liquidity problem
for NBFCs will not go away early, to boost funding to NBFCs, banks exposure
limit to a single NBFC has been raised from 15% to 20% of the banks Tier 1
capital. Lending to agri sector ( upto 10 lacs), to MSMes (upto 20lacs )
and to Housing Loan (upto 20 lacs) is
classified as a Priority sector loans.
Economic deceleration,
which is cyclical and not structural in nature, has intensified over last few months and
data broadly paints a picture of subdued demand – especially in private
consumption – in which firms and households continue to hold back spending. Central govt spending is just 2% up in Q1
FY20 and aggregated key spending by 19 states in just up by 0.2% which may
impact governments ability to pump prime.
RBI hopes that the
delayed monsoon will pick up in the remaining period and may cover the deficit
gap, though the area under acreage will be marginally lower than last year.
The proposal to set up a
Central Payment Fraud Registry to track frauds in the payment system is welcome
step and will strengthen the banking system.
IMC opines that ‘optimism’ is the key to economic pickup and the rate
cut with right communication and cues on liquidity would help in boosting
confidence in the economy.
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