Mumbai: Lower inflation, faster resolution of distressed assets and ensuring banks have enough capital to make provisions will be the top macroeconomic priorities for the Reserve Bank of India (RBI) in the immediate future, governor Raghuram Rajan said in the central bank’s 2014-15 annual report.

Rajan termed the following three areas as “work in progress" and described them as challenges in the current macroeconomic environment.

“First, economic growth is still below levels that the country is capable of. Second, inflation projections of January 2016 (as of early August 2015) are still at the upper limits of RBI’s inflation objective. Third, the willingness of banks to cut base rates—whereby they forego income on existing borrowers in order to attract more new business—is muted," Rajan said in his overview at the beginning of the annual report.

In the report, the central bank said the growth outlook for the Indian economy is improving gradually as business confidence remains robust, even as it reiterated its gross domestic product (GDP) growth forecast of 7.6% in 2015-16, up from 7.2% reported in 2014-15.

Though inflation has so far closely tracked projections, developments on this front “will warrant close and continuous monitoring", RBI said.

India’s consumer price index (CPI) eased to 3.78% in July, much below RBI’s January 2016 target of 6%. By January 2017, the central bank wants to bring inflation below 5% “as part of its overall disinflationary strategy". RBI’s target is to bring CPI down to 4% by January 2018.

“The efficacy of the monetary policy transmission mechanism needs to improve since the pass-through of recent cuts in policy rate to the bank lending rate has been partial, reflecting the constraints in transmission under the existing base rate system," RBI said.

RBI has lowered its policy rate by 75 basis points since January, but banks on average have lowered their lending rates by only about 30 basis points. One basis point is a hundredth of a percentage point.

RBI now wants banks to switch to marginal cost of deposit for calculating their base rate so that policy transmission takes place more effectively.

Saugata Bhattacharya, chief economist at Axis Bank Ltd, said though RBI has reiterated most of the things which were already in the public domain, there is a sense that interest rates will not single-handedly prop up investments.

“Fiscal policy along with a bankruptcy code will also have to play a role in supporting investments. In other words, the sense from the report was that monetary policy should be supported by fiscal policy," Bhattacharya said.

The central bank also suggested that the Union government “front-load" its disinvestment plans to take advantage of supportive market conditions while cutting back on capital expenditure to meet its fiscal deficit target of 3.9% of GDP by the end of the current fiscal year.

The government’s project monitoring group has cleared 291 projects worth 9.9 trillion till mid-August, across power, coal, road and petroleum sectors.

To make priority sector lending hassle-free and attractive for banks, the central bank will operationalize a mechanism for issuance of priority sector lending certificates. These instruments can be traded among banks.

In the current year, the central bank also plans to operationalize the Trade Receivables Discounting System, an electronic platform to facilitate discounting of bills of exchange of micro and small enterprises.

Foreign investors’ limit in debt instruments will also be reviewed this year. The central bank had earlier said it plans to denominate the debt limit of foreigners in rupee, rather than dollar, terms. This should open up at least 30,000 crore for foreign investors in the debt segment. At present, foreign investors can invest up to $30 billion in government debt and $51 billion in corporate bonds issued by Indian companies.

“RBI, in consultation with the government, intends to put in place a structured process for fixing these limits along with a framework for periodic reviews. Encouraging retail participation in government securities continues to engage the bank’s attention," the annual report said.

To deepen the corporate debt market, the central bank will consider implementing an electronic platform for facilitating ‘repo’ in corporate bonds. ‘Repo’ indicates mortgaging a security for borrowing money, usually at a discount to its face value.

RBI will also issue guidelines for foreign banks’ ownership in private sector banks, which will include raising the ceiling on voting rights from 10% to 15%, following the wholly owned subsidiary framework norms issued in November 2013. Four foreign banks have so far applied to open local units in India.

The annual report also contains information on the central bank’s balance sheet and human resources. RBI holds 557.75 metric tonnes of gold, of which 292.26 metric tonnes are held as backing for notes issued and the balance is treated as an asset of its banking department.

As on 30 June, the value of gold held as an asset of the banking department declined by 1.93% year-on-year to 57,884 crore, on account of the decline in international gold prices.

The banking department’s foreign investments, which include sovereign bonds and overseas deposits, increased to 7.276 trillion.

RBI’s domestic securities came down by 22.58%, to 5.17 trillion. The change was on account of the accounting treatment of the bank’s liquidity management operations.

“To encourage specialization, the bank will also consider promoting some particularly capable employees in situ. For most employees, however, as they become more senior, skill-building will shift from acquiring technical skills to acquiring managerial skills. At very senior levels, these officers will again be posted freely between clusters," Rajan said, adding that RBI is now losing more junior officers than earlier.

“This is why a revamp of the professional challenges we offer our staff is very much needed, and we hope the changes outlined earlier will help us become a more attractive employer. In this regard, our review of compensation, as well as the long-pending improvement in pensions for our retirees also assumes importance," he added.

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