Rate cut possible only if inflation eases: Rajan

Reserve Bank of India’s latest annual report under outgoing governor Raghuram Rajan emphasised the need to bring down consumer inflation, continue the ongoing clean-up of the banking sector, as well as increase the size and depth of the country’s financial sector among other measures.

Ghosh also highlighted several demands and concerns of RBI as a reason for joining the strike.

Additionally, the RBI report said the commitment of the central government to the path of fiscal consolidation in 2016-17 has enhanced the credibility of fiscal policy, which will, in turn, help in anchoring inflation expectations and in improving the business environment, including by fostering credibility among global investors.

“First, economic growth, while showing signs of picking up, is still below levels that the country is capable of”.

In the name of recapitalisation of banks suffering from huge bad debt to corporates, government plans to drain out RBI Reserve Fund of Rs 2 lakh crore overriding RBI objections and crippling RBI financially, he claimed. Rajan also reiterated the RBI’s aim to bring down Consumer Price Inflation to 5% by the end of the current financial year, Bloomberg reported.

Retail inflation shot past the six-per cent mark in July.

But that apart, considerable slack in the industrial sector continues to weigh on the outlook; the capex cycle remains weak; and subdued private investment could be one of the reasons for below-par growth previous year.

However, the willingness of public banks, especially those with stressed assets, to pass on lower interest rates to customers, remains muted.

“Not only does weak corporate investment reduce the volume of new profitable loans, their stressed assets have tightened capital positions, which may prevent them from lending freely”, Rajan said. “Certainly, the reluctance to lend to industry and small businesses is more visible among the more stressed public sector banks compared to the private sector banks”, said Rajan. However, consumption demand led by a good monsoon, government wage increases as a result of the award of the Seventh Pay Commission and overall economic pick-up should help the economy register gross domestic product growth of 7.6 per cent in 2016-17, up from 7.2 per cent previous year.

“With the final demand picking up, capacity utilisation is likely to increase, and so will investment”.

Rajan said the asset quality review initiated in early 2015-16 has improved recognition of NPAs and provisioning in banks enormously, with some banks taking significant steps in recognising incipient stress early. “Participation is best enhanced not through subventions and subsidies but by creating supporting frameworks and new institutions that improve transparency, contract enforcement, and protections for market participants against abusive practices”.