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What does the RBI say about the future
When the Reserve Bank of India announces its credit policy, there is an extensive coverage in the media. RBI releases a bunch of policy documents that give us a peak into what lies ahead.
For the record, the country's central bank cut the repo rate last week, the interest rate at which banks borrow from the RBI, to 7.25% from 7.5%. This rate effectively decides the rate banks set for businesses and individuals. RBI did not make any changes to the cash reserve ratio or CRR. This is the portion of deposits that banks have to maintain with RBI. When RBI cuts this ratio, banks get more money to lend to borrowers.
Here are five things that give a sneak peek into what lies ahead for the economy:
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Growth rate forecast to be lower v/s Government’s projection: A cut in benchmark repo rates alone cannot revive India’s economic growth. RBI has forecast India’s economy to grow at 5.7% in 2013-14 lower than estimated by the government. The outlook for industrial activity remains subdued, with the pipeline of new investment drying up and existing projects stalled by bottlenecks and implementation gaps. The government has identified 215 stalled projects and 126 that were not even started, according to one media report (link below). A new cabinet committee on investment cleared USD 27 bn worth of projects, the report adds. The government needs to do more.
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Indian economy faces significant fiscal challenges:RBI has flagged the current account deficit as the biggest threat to the economy. This is the money India owes in foreign exchange to the world. A high current account deficit leads to a weak rupee and further strokes inflation. “A large current account deficit, appreciably above the sustainable level year after year, will put pressure on servicing of external liabilities,” RBI said in its statement. India imports nearly 80% of its crude oil requirements, over 20% of its coal needs and is one of the largest importers of gold. These large imports have resulted in the large current account deficit numbers.
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Inflation will ease further, but risks may continue: Headline inflation, as measured by the wholesale price index (WPI), moderated to an average of 7.3% in 2012-13 from 8.9% in the previous year. RBI expects this to moderate to 5.5% in 2013-14. India’s central bank considers inflation as the main enemy. If inflation stays high, it eats into the growth of an economy. RBI does not want to lower its guard against the possibility of resurgence of inflation pressures by making rapid cuts in interest rates. RBI fixes rates to determine the cost of money in the economy. Easy money policy increases money supply.
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RBI sees little room for rate cuts: The government wants low rates to stimulate growth that fell to 5% from a high rate of 8.5% two years ago. However, RBI sees little space for monetary easing or rate cuts. Besides the situation of government finances, RBI is worried about soaring food prices. The RBI wants the government to ease the pressure on the food inflation by making it easy for producers to increase supply to the market. This is possible only if the supply infrastructure is improved. The government needs to build infrastructure that includes roads and facilitate better storage for food produce.
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Banks to improve services, offer better rates to customers:The advent of Aadhaar cards for individuals in India could change the face of banking. RBI is studying the possibility of using Aadhaar cards as additional factor of authentication for card transactions. RBI’s policy document highlights the need for better customer service too. RBI is worried about variation in interest rates offered by different banks on the same day. It is important to note that as a borrower, you need to negotiate with your banker to get good rates on your loans.
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15%
RBI projects a growth of 15% in non-food credit. This is the money banks lend to businesses. This determines the ability of businesses to expand capacity and create new jobs. It is a critical number to project any future economic growth. Non-food credit growth decelerated from 18.2% at the beginning of 2012-13 and remained close to 16% for the major part of the year. By March 2013, non-food credit growth dropped to 14.0 per cent, lower than the indicative projection of 16.0 per cent, reflecting some risk aversion and muted demand, according to RBI’s policy document. “While the Reserve Bank’s credit conditions survey showed easing of overall credit conditions, there was some tightening for sectors such as metals, construction, infrastructure, commercial real estate, chemicals and finance in fourth quarter of 2012-13,” RBI said in its review.
