Mumbai: Finance minister Pranab Mukherjee on Saturday said the government is confident that the Indian central bank will “adjust” its monetary policy factoring in the current macroeconomic concerns in Asia’s third largest economy reeling under slow growth and high inflation.
With the growth in Gross Domestic Product (GDP) slowing to a nine-year low of 5.3% in the fourth quarter of last fiscal, the Reserve Bank of India (RBI) is widely expected to cut its key lending rate to prop up growth The RBI is set to announce its mid-quarter review of annual monetary on Monday.
“Keeping in view of all current factors, I am confident that the RBI will adjust monetary policy as we are adjusting the fiscal policy,” Mukherjee said speaking at the National banking and insurance conference organised by industry body Assocham.
Economists, however, expect the RBI’s rate action confine to 25 basis points (bps) as inflation still remain persistently high in the economy. The wholesale price based inflation rose to 7.55% in May from 7.23% in April. One bps is one hundredth of a percentage point.
Noting that inflationary pressures still persists in the economy, Mukherjee said, the ability of monetary policy to tackle food inflation is limited.
“The supply side constraints have to be removed…the government is taking steps not sitting idle”.
To tackle inflation, the RBI hiked its key lending rate 13 times since March 2010 but began reversing the rate cycle by cutting the repo rate, at which RBI lends short term funds to banks, by 50 bps in April.
Mukherjee said the government has suggested the state governments to temporarily reduce the tax burden on petrol till crude prices cools down to 90 dollar per barrel in the international market. That will help the union government to reduce subsidy and will bring some relief to the customers.
“Difficulty has to be shared by all stakeholders,” he added.
To ensure inclusive growth, there is a scope to improve financial literacy and a “rapid awareness” and capacity has to be built up for formal banking and credit channel to all category of people, Mukherjee said.
Banks should ensure that each family should open at least one bank account so that government is able to directly transfer funds to beneficiaries through electronic banking channels. Banks should focus to meet the local need of the customers and offer specific products to meet the needs of local customers, the finance minister said.
The banks “need to consolidate their progress in meeting priority sector targets,” the finance minister said adding that so far the progress has been good. Banks have crossed Rs 5 trillion in disbursement towards agriculture as against the total credit target of Rs 4.75 trillion set for banks in fiscal 2012.
Government will continue with its interest rate subvention scheme for agriculture loans where the government gives 3% subvention to banks for giving loans to farmers at 4% interest.
“The scheme is working exceedingly well,” the finance minister said. Indian banks have also achieved offering banking services to 74,000 villages as against the target of 73,000 by March 2012, Mukherjee said.