Credit policy sets the stage for a growth stimulus in next month’s budget2 min read . Updated: 06 Jun 2019, 11:35 PM IST
- The RBI has a retail inflation target of 4%, with an upper tolerance level of 6% and a lower limit of 2%
New Delhi: The Reserve Bank of India (RBI), which cut the benchmark interest rate by 25 basis points (bps) for the third time since February, has set the stage for finance minister Nirmala Sitharaman to deliver a strong growth stimulus to the economy when she presents the Union budget for FY20 early next month.
The central bank, which changed its monetary policy stance from ‘neutral’ to ‘accommodative’, has diagnosed the pain points in Asia’s third-largest economy that is losing steam and has fallen behind China in the pace of expansion.
The monetary stimulus offered by the central bank seeks to lower the cost of funds to businesses and aid investments into new projects, a weakness that governor Shaktikanta Das highlighted, referring to declining capital goods imports.
The government of Prime Minister Narendra Modi has little time to lose in deftly handling the adverse socioeconomic headwinds. It has already set up two new cabinet committees led by Modi himself to work on investment and growth and jobs and skill development, according to an official announcement on Thursday.
The NDA will also have to prove its skills in managing the economy.
RBI’s six-member monetary policy committee (MPC) took a unanimous decision to cut rates at a time when businesses are demanding cheaper funds. This implies that the central bank and the finance ministry are on the same page on the need for a growth stimulus.
Relations between the ministry and the central bank, which had soured over issues relating to the latter’s autonomy in the not so distant past, has improved since Das took over the reins in December following the abrupt resignation of his predecessor Urjit Patel citing personal reasons.
The monetary policy statement lowered the gross domestic product (GDP) growth projection for FY20 to 7% from 7.2% in April. The MPC said a sharp slowdown in investment activity, along with a continuing moderation in private consumption growth, is a matter of concern. Das also said import of capital goods, a key indicator of investment activity, remained weak in April. He also said that there was a nominal growth in rural wages while organised sector staff costs remained muted.
“RBI is clearly trying to ease constraints relating to the cost of funds and to stimulate the economy. The government too recognises the pain points in the economy and is trying to address them. What the government will come up with in the budget may depend on several factors, including the fiscal space available to it," said D.K. Joshi, chief economist at rating agency Crisil.
Das said that as inflation has remained below the banking regulator’s target, despite the 25bps rate cut in February and April, there is a scope for boosting demand and private investment. The central bank has a retail inflation target of 4%, with an upper tolerance level of 6% and a lower limit of 2%.
“The reduction in the benchmark rate is expected to lower the cost of funds, boost credit off-take and, therefore, spur investment. It will also enable acquisitions and make investments in infrastructure or other asset classes with stable cash flow more attractive," said L Viswanathan, partner, finance and projects practice at Cyril Amarchand Mangaldas, law firm.
Growth slowed to 5.8% in the March quarter, the slowest in five years. Businesses say the tight liquidity condition is one of the speed breakers to growth. For Sitharaman, the budget will be a tough act of balancing lower than expected revenue receipts and a need to spend more than earlier estimates.