The current state of the economy and inflation did not warrant a change in the key policy rates, which RBI governor Raghuram Rajan left unchanged. He was optimistic about the met department’s prediction of a good, above-normal monsoon spread evenly across the country, and felt this, coupled with the government’s actions on the supply side and food management front, would offset the fears on food inflation that surfaced recently.
This does not mean that there are no risks ahead — like firming oil and commodity prices, weak manufacturing numbers that pulled down the industrial production figures and declining exports. But the governor would be watching the situation whilst maintaining his “accommodative” stance. The good news is that growth and corporate performance are improving, the fourth quarter results of companies have been encouraging, and India still remains the fastest growing economy in the world at 7.6 per cent.
The private sector is, however, still reluctant to invest, and it is government spending primarily that is keeping the economy ticking. Many corporates do not have access to loans. Besides, global growth is anaemic. But the cleaning up of the banks, now underway, would give the banks enough space to lend. Banks had been shy of lending for fear of creating more non-performing assets (NPAs).
Union finance minister Arun Jaitley has done well to assure the banks that to clean up their NPAs that he would “protect” them by infusing the funds that they need. Bankers have been reluctant to reach a settlement with promoters who have huge loans as they have to take a substantial “haircut”, meaning forego a significant portion of the loan amount. This, in turn, affects their balance sheets.
With Mr Jaitley’s assurance they will now be more confident in tackling their huge NPAs problem. There is still a lot of work to be done to help corporates get back on their feet again, and the government and Sebi are said to be in dialogue on this critical issue. It is interesting that Dr Rajan held his own in the face of political pressure to cut rates. He has shown that he is his own man, one who will not succumb to pressure to cut rates and will go by what he feels is best for the economy.
In fact, anticipating the media’s curiosity about his continuance as RBI governor after September, when his term expires, he came to the usual post-monetary policy media briefing with a prepared statement and, with great style, asked the media to see the statements made by the Union finance minister and the Prime Minister for the answer.
