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 (Photo: Mint)
(Photo: Mint)

Opinion | RBI plays its part, over to banks to improve liquidity

The MPC has appropriately acknowledged the issues that are surrounding the economy

Along expected lines, the RBI cut the repo rate by 35 basis points instead of the conventional practice of 25 bps or 50 bps. First and foremost, it is a new normal from the Monetary Policy Committee (MPC), clearly indicating the downward bias toward interest rates. Since last November, the RBI has recognized the need to proactively cut interest rates and provide more liquidity and bring stability to the financial markets, as well as bring down the interest cost for borrowers. Its effort has definitely led to a significant drop in interest rates for government securities. It has also brought stability in the overall liquidity in the market, reflected in the overnight rates and RBI repo window.

The MPC has appropriately acknowledged the issues that are surrounding the economy, impacting growth across different segments of industry. Since the time IL&FS crisis happened and the subsequent impact on NBFCs, it had its own role to play in the recent slowdown across different pockets of the economy. While it was initially felt that the issues were related to one or two players, over time it began impacting almost all sectors, leading to a demand slowdown. Auto and related industries were impacted due to the NBFCs’ inability to lend and other regulatory negative impact on the sector. The current slowdown across different sectors is also coinciding with the lower growth outlook that is being witnessed in different parts of the world. The recent fall in US yields is also a reflection of the beginning of a global slowdown, coinciding with the US-China trade war. On an overall basis, while the expectation of inflation is stable-to-low, there has been considerable pressure on the growth outlook in the absence of major investments .

The majority of the members of the MPC have recognized aptly the current challenges being faced by our economy and has supported the more than expected rate cut of 35 bps. While the RBI has been doing its job in giving the right signal to the market, it is now the turn of the banking industry to cut lending rates quite sharply to boost lending growth. So far there has been a contraction in lending by banks to the needy sectors. However, given the sharp cut in policy rates, the RBI should force banks to cut lending rates.

Mutual funds have been playing a big role in the transmission of rates to borrowers in the form of buying either the CPs or bonds. However, given the recent criticism of mutual fund exposures to so-called weaker credits, in turn becoming risk averse, and the reluctance of banks to lend to various sectors, it might continue to be a challenge for the lending rate to come down. In order to make this happen, there will still remain a need to boost confidence and remove the trust deficit through some more measures outside the policy framework. While some steps have been taken there is a clear need for rotation of money to come back through removal of the trust deficit. This rotation will come back only when the belief system goes up in the credit market. Every player of the segment should step up the focus on improving the credit delivery system. Hope this gets addressed soon to get our economy back to normal. The stable government and the global slowdown, ideally speaking, should give an edge to India over other emerging markets.

A. Balasubramanian is MD & CEO, Aditya Birla Sun Life AMC

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