RBI seen retaining policy rates, accommodative stance

RBI monetary policy review
RBI’s monetary policy committee may choose to ignore falling credit off-take, especially the share of private corporate sector.

By Charan Singh

RBI monetary policy review: Indian Economy needs to be seen in the context of global events. The IMF has estimated a growth rate of 4.9% for the global economy in 2021. It has predicted a decline in the growth rate for emerging countries and an increase for advanced countries. In the last few months, the US, the UK and the Euro area have retained policy rates while Russia and Brazil have raised the rates.

The IMF’s growth projection for India has been cut to 9.5%, a sharp reduction of 3% from the April estimates. IMF says commodity prices have been rising which will have an impact on the global economy. The prices of petroleum goods in July 2021, over December 2020 have increased by 30%. This has an implication globally on the price level. The IMF says this transitory rise in inflation should not be seen as a long-term trend and that the central banks should not raise policy rates just for inflation.

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Mixed signals for RBI

The domestic scene is completely different. The monsoon is fairly on track, implying that agriculture sector is well poised for growth. However, the banking scene is worrisome. Credit off-take is lower whereas deposits have been increasing at a rapid rate. Banks are flush with resources. The share of industry in credit off-take, especially of the private corporate sector, has declined while for retail loans, an increase is noted. The share of personal loans and housing sector is rising significantly.

The delinquency rates that have been published by the RBI in its latest Financial Stability Report show that there is an increase compared to March 2020 in case of NBFCs/HFCs and private banks. This is a matter of concern. The expected third wave of Covid-19, because vaccination is still not complete, can slow down the economy further.

The balance sheet of corporate sector has started reflecting on the balance sheets of commercial banks. So, in the next few months, it is a matter of concern that the balance sheet of commercial banks may record higher volumes of NPAs despite the fact that commercial banks are making adequate provisioning.

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The other indicators in the economy are robust. The Index of Industrial Production (IIP) for May 2021 shows that all industries are recording significant growth, especially capital goods and manufacturing. Similarly, if the eight core industries are observed, same trend is noted and growth is picking up, especially in steel.

The CPI is at around 6%, mainly on account of oil, fats, fruits and pulses. The expectation survey done by IIM Ahmedabad shows that the inflation expectation one year ahead continues to be less than 6%. The WPI is in the range of 10-12%, but the increase in oil prices and the price of manufactured goods are the factors that have led to higher inflation under WPI.

The increased inflation is transitory and the RBI should not increase the policy interest rates as has been done by Russia and Brazil. India should follow the pattern of the US, UK and the Eurozone and keep the interest rates unchanged. The RBI should also retain its accommodative monetary policy.

(Dr Charan Singh is CEO and Director, EGROW Foundation, a Noida-based think tank. This article is the reproduction of his presentation at the shadow MPC meeting organised by EGROW Foundation.

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Dr Charan Sigh is a Delhi-based economist. He is the chief executive of EGROW Foundation, a Noida-based think tank, and former Non Executive Chairman of Punjab & Sind Bank. He has served as RBI Chair professor at the Indian Institute of Management, Bangalore.