Category: Money, inflation & interest rate

RBI’s commitment to ‘last-mile disinflation’ has prompted a continued tight monetary policy stance, raising questions about its impact on economic growth On April 5, 2024, announcing the decisions taken by the six-member Monetary Policy Committee (MPC) in its first bi-monthly meeting of the current financial year (FY), Governor Shaktikanta Das observed “The elephant has now gone out for a walk and appears to be returning to the forest. We would like the elephant to return to the forest and remain there on a durable basis,” Das was using the elephant analogy to characterise the trajectory of retail inflation as represented by the Consumer Price Index (CPI). Having scaled to a high of 7.8 per cent in April 2022, CPI has...

RBI’s decision to keep the policy rate unchanged could pose a serious risk to growth due to a rise in lending rates and higher-cost of loans to industries The Reserve Bank of India (RBI) six-member Monetary Policy Committee (MPC) on December 8, 2023, decided to keep the policy rate (the interest rate at which the RBI lends to banks) unchanged at 6.5 per cent. The MPC has also said that the actions of the RBI will remain “actively disinflationary”. The decision is a continuation of a trend wherein the RBI has been overly obsessed with the management of inflation and aggressively used the two prime monetary policy instruments in its armoury namely the policy rate and liquidity (a jargon for...

As per the information given by the Ministry of Finance (MoF) in Parliament, during the last nine years, scheduled commercial banks (SCBs) have undertaken an aggregate recovery of Rs 10,16,617 crore of loans that had gone bad or non-performing assets (NPAs) as these are called in banking parlance. In reply to a question given in the lower house, Minister of state for finance Bhagwat Karad informed that “Comprehensive measures have been taken by the Government and RBI to recover and  to reduce NPAs, including those pertaining to corporate companies”. These include  the 2016 Insolvency and Bankruptcy Code (IBC), and the establishment of the National Asset Reconstruction Company Limited (NARCL),  among other measures. At banks’ level, the efforts involve early recognition...

PSL is a legacy of the socialist era. It creates distortion in credit flows, keeps bank officials busy with target fulfillment and is prone to blatant misuse  Lenders, especially foreign banks have decided to undertake a comprehensive analysis of “sustainable finance” under the aegis of the Indian Banks’ Association (IBA) to make out a case for granting priority-sector lending (PSL) status to such financing for consideration by the Reserve Bank of India (RBI). Globally, “sustainable finance” is broadly defined as any form of financial product/service that promotes environmental, social and governance purposes while contributing to the achievement of relevant targets adopted by countries under frameworks, including the Paris Agreement on climate and the Sustainable Development Goals (SDGs) set by the...

The government should strengthen mechanisms to give a fair deal to MSMEs According to a joint report by ASSOCHAM and Crisil Ratings, gross non-performing assets (NPAs) – an acronym for loans that have gone bad – of banks have declined by 0.9 to less than 5 per cent during the financial year ending March 31, 2023, and are expected to decline by another 1 per cent to a decadal low of less than 4 per cent by March 31, 2024. In respect of loans given to the corporate sector, gross NPAs are expected to be less than 2 per cent by March 31, 2024, down from a peak of 16 per cent as on March 31, 2018. The public sector...

Too much reliance on monetary policy instruments such as a hike in repo rate is of little help Having already increased the repo rate or RR (interest rate at which the Reserve Bank of India lends to banks) by a cumulative 2.5 per cent in the past 11 months, the RBI’s six-member Monetary Policy Committee (MPC) on April 6 voted unanimously to keep it unchanged at 6.5 per cent. However, RBI Governor Shaktikanta Das pledged to hike the RR again if needed, saying the decision to pause was “for this meeting only”. In 2016, the Government put in place an institutionalised framework, the MPC, to formulate monetary policy and determine the key interest rates. It mandated the RBI to fix...