Tuesday, December 02, 2014

RBI: No rate cut, no liquidity crunch

There has been clamour in the last few days in the media and the so-called market-friendly economic pundits that it is time that the Reserve Bank of India (RBI) should cut interest rates so that there will be increase in credit off-take which in turn will trigger greater economic activity. The finance ministry, under P.Chidambaram in the last one-and-a-half years and under Arun Jaitley in the last six months, is of the view that cut in RBI interest rates will kick-start economic activity. RBI governors, Duvvuri Subba Rao then, Raghuram Rajan now, have resisted the finance ministry pressures and allowed the interest rates to be relatively high. When Rajan went to RBI, the expectation was that the smart America-trained economist would do what Rao,an interesting combination of economic expertise and adminitrator, did not. But Rajan followed the cautious route.
In the assessment of the economic situation, the RBI governor has stated that the inflationary pressures are likely to remain high though the overall inflation has decreased considerably in the last six months. He said that because of the failure of the south-west monsoon, followed by a not-so-good north-east monsoon, food prices could rise in January and so will inflation as a consequence.


The world economic situation is marginally better with the US showing signs of recovery, and so does Japan despite the acute deflation of the economy. The European Union zone is still in recessionary trouble.
In his statement, Rajan notes: "With deposit mobilisation outpacing credit growth and currency demand remaining subdued in relation to past trends, banks are flush with funds, leading a number of banks to reduce deposit rates."
There is a suggestion that banks can reduce their lending rates and the slow credit off-take seems to be due to the fact of "increasing reliance of large corporations on commercial paper and domestic as well as external public issuances."
It is expected that growth in Quarter 3 and 4 too will remain subdued, and that the prospects for takeoff next year seem plausible. The RBI is pegging the rate growth for 2014-15 at 5.5 per cent.

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