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Go beyond interest rate cut

Kashmir Times. Dated: 4/23/2016 1:39:11 AM

Apart from better credit flow into the markets for improving the investment climate in the country, the centre has to check inflation

The cut in repo rate by 50 basis points by the Reserve Bank of India (RBI) has been on expected line, third in 11 months of the current financial year may not be seen as a step in the right direction for the banking sector in India at this stage. The disappointments may be high on the quantum of cut in repo rate, at which the RBI lends money to scheduled banks because of various factors that are affecting the economy in the country when international market is also showing strains due to fall in prices of majority of the commodities. The central bank has also been cautious in taking such a step at this stage when there are confusing signals on the inflation front in the nation. It may or may not affect the lending and advancing of loans by the banks. This is mainly for the reason that majority of the banking which has not been seeing a high growth rate which has been restricted to the lowest double digit due to slowdown in the economy. Moreover, most of the banks are not willing to pass on the rebate in repo interest rate cut to the customers because they have been making all out attempts to bring down the bad loans that are contributing in a big way in the Non-Performing Assets (NPA) during the past many years. They have been trying to limit them to tolerable figures as there has been a lot of pressure from the RBI in this direction without allowing any concession to their clients despite cut in repo rates during the past three quarters. The reluctance of the banks in passing on the benefits to the loan customers is understandable for these reasons. The inflationary pressure from the market has also been adding to the woes of the corporate houses and short term loan beneficiaries and resulting in bad loans which have been mounting for various reasons during the past few years. Finding it difficult to cope with the pressure from the market, the banking sector has been going slow in advances in all sectors except for consumer goods and housing loans.
Despite the fact that the central bank has a limited width to go beyond measured step as the banks have a tough balancing act to perform in view of the pressure on their margins. Apart from this, the central bank is still unsure of the inflationary clouds having disappeared from the horizon. Firming up of crude petroleum prices in the international market and predictions of low and deficient monsoons in India have been bothering not only the RBI but also the entire banking sector. Due to these complexities of the Indian economy, the RBI has been cautious in taking steps on easing pressures on the banks during the past few quarters. There have been sudden cuts twice in March this year itself in repo rates by the RBI only when it was sure of less strain from the inflationary march upward. In the same process, now the central bank has been suggesting financial institutional investments in the public sector scheduled banks for easing the credit flow to the market. The results from the last quarter's repo rate cut by the RBI for improving the credit flow have not been very encouraging enough to allow the banks to go in for free flow of credit in the market so that trajectory of growth could be pushed up as the central government has been making efforts to do so. The RBI's suggestions to infuse investments in the key sectors for pushing up the growth in the country has had limited effect and could not targeted levels due to various factors. The biggest relief for the central government has been volatility in the international market of crude petroleum prices that kept the inflation on the lower side during the past more than one year. But the increase in prices of petroleum products in retail has not matched the dynamics of ups and downs in the international market inviting anger from the general public. It is for the central government to act on its own and show some way out for fueling the economic growth rate for improving the overall health of this sector in India.