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Input from experts on Shadow Monetary Policy Committee on December 2018

Prof. Nalini Prava Tripathi, IIM Shillong

I feel the interest rates should remain at the existent levels or should go down by 25 basis points, to ease the liquidity crunch pervasive in the country and in the finance sector particularly.
Monetary Policy as it is known, determines the outlook of the lending and borrowing rates. Major considerations are given to the macroeconomic factors prevailing in the region while devising the monetary policy. In this edition of shadow MPC we will try to gauge the RBI’s eventual decision and base our decision on the current conditions of the economy.
Major factors under consideration:
After taking heavy beating in the past few months the markets have started to take a bullish mood. The crude prices have relaxed giving the market sentiment a well needed respite. The rupee has also strengthened in the past few weeks giving the whole macro economy a positive outlook. The retail inflation is also down from the highs that were seen in August and September, partly due to the crude price decline. So, increase in the lending rates is not warranted owing to the inflation.
The investments are on the lower side considering the liquidity crunch and the troubled infrastructure sector. RBI needs to push the investments up and increase the liquidity in the broader horizon for the betterment of the country. The liquidity in the NBFCs is a much-debated topic in every quarter and the policy should take that factor under consideration.
The fed rates in US are also expected to go up, creating a lending crunch in the biggest economy, there would be spill-over effects of this on our economy as well. The global trade has been down in the past two quarters owing to the uncertain trade conditions brewing across the globe and tensions brewing between major trading powers. The downturn in the trade have affected the current account of the country in a detrimental way.
The general elections are on the horizon and the general public sentiment during such a time is buoyant, and the policy should take that into consideration while deciding upon the lending and borrowing rates. It must be said that the policy is made by looking at the data which has happened in the last one year and tries to take decision today which will shape the next 6-12 months of the economy and the country overall. This decision shapes not just how the businesses are carried out but also how daily activities are carried out in the country.
I feel the interest rates should remain at the existent levels or should go down by 25 basis points, to ease the liquidity crunch pervasive in the country and in the finance sector particularly. The general elections should also be a major motivation and driving force behind any decision that is made.

SJS Swamidoss, Former Research Director, RBI

There is need for having more survey on different aspects of the economy. There are regional differences and these need to be taken into account while formulating the monetary policy. There are differences in economic activities in different regions of the country. This is clearly reflected in employment and banking.
I am giving some suggestions on the need to, in the present circumstances, have selected indicators that could only be generated through regular surveys of the markets. This is necessary to discount the arbitrariness that could creep into our assessment of the trend in the economy. Surveys relating Regional-level activities is to be considered important for having more realistic inputs for policy-making. With this end in view, in my brief interactions with reference to gathering information on business activity, banking and employment in Tamil Nadu, I could gather following trend:
A. Internal trade
Wholesale dealers in essential commodities are confirming fall in business level as a result of deliberate decision on the part of retail dealers to have lower level of sales turnover to avoid GST payment. This is resulting in the following:
1. Reduction in manpower employed by retail shops because of lowering their turnover.
2. This leads to forced reduction in sales of wholesale business and consequent reduction in people employed in their establishment. A wholesaler told that in his shop, he was employing 10 persons, and has reduced to 3 persons. He says that this is a universal trend in Tamil Nadu.
3. This trend would reduce the GST receipts for Tamil Nadu Govt.
Further proper surveys may be necessary to have definite inputs.
B. Banking
Bankers say the following:
1. Large banks in Tamil Nadu say that there is no investment expansion by corporates after demonetisation.
2. Money market is tight in Tamil Nadu.
3. Govt. has promoted diversion of investment from bank FDs to MFs first through rate of return differential; and then imposed tax on return on MF investment in order to augment Govt's revenue receipts.
4. Banks have become very cautious in lending to avoid exposure to borrowers considered to be potentially falling into NPA status if loans are given. Several public sector banks have been asked not to go into credit expansion, but to maintain the current level of lending, in view of large NPA level. Banks are ready to give personal loans and consumption loans which are safer. This has implications for demand management, if proved positive for all regions in the economy.
C. Employment
In my deliberate interactions, I am seeing a new type of disguised unemployment in Tamil Nadu. Most establishments and even big corporates employ people on contract basis. After one year or so, when the contact period is over, they send these people out and employ fresh people. This is done for cutting wages cost. This trend, if proved to be universally true, could have implication for demand, savings, etc.
D. Conclusion
Difference in trend in various regions in the economy that would not get reflected in statistics built usual basis, could undermine efficacy of policy prescriptions. For example, at present the policy prescriptions are common to all regions, irrespective of differences in trend and requirements between regions. Let us consider regional level differences in economic activities, demand, income levels, etc. and think of formulating credit policy accordingly.

Prof. N N Sarma, Krishna Kanta Handiqui State Open University, Guwahati

The real driver of growth has to be the inherent internal strengths of the industrial units backed by the eco system. The macro focus should be on creating the congenial conditions.
Ongoing measures on reduction of NPA and efforts to collect the bad debts have proved to be effective for introduction of CIBIL framework to ascertain credit worthiness, tracking system enabled by core banking, revamping of recovery processes and sensitisation of banking service providers on the issues.
The Banks and Financial Institutions Act of 1993, and Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act of 2002 have worked as enablers. SARFASI has empowered banks to seize borrowers’ assets without going to court. The slow functioning of debt recovery tribunals is no longer a major problem as regards small lending. However, for large credits, recovery and litigation related matters have remained complex. In the NE context, we have not experienced much of the complex borrowing in case of large credit, as large scale projects are not found to be high in number. Finding credit worthy proposals is a problem, which is attributed to lack of congenial entrepreneurial culture and ecosystem for development of entrepreneurship.
Personal consumer loans are on the rise. The economy of the North-East India is highly driven by consumer demand. Economic growth is related to rise in consumption demand. Consumption at the lower strata of the society is an indicator. The manufacturing sector or for that matter the secondary sector is not having that much presence in North-Eastern India. It is mostly agrarian. The service sector at the low end of sophistication is on the rise. Allocation of government budget on developmental schemes and infrastructural projects have also been a driver. Consumption contributes to more than 60% of India’s gross domestic product. In the NE context, it is more evident.
Developmental interventions and measures related with industrial promotion have to be looked into keeping the entrepreneurial factors in view. The North East Industrial Investment and Promotion Policy aimed at facilitating conditions. The transport subsidies, loan waiver schemes or the capital subsidies can facilitate. However, the real driver has to be the inherent internal strengths of the industrial units backed by the eco system. The macro focus should be on creating the congenial conditions.

Prof. R R Sharma, International Management Institute

RBI may not change the benchmark lending rate (repo) despite moderation in economic growth as policy mandate is to support growth while anchoring inflation

Many analysts expect a rate increase today to combat inflationary pressures arising from high oil prices and weakening rupee.The retail inflation is expected to go above RBI projection of 5% by June 2019 due to high oil prices,weak rupee and strong consumer spending in an election year.RBI retains GDP growth projection for 2018-19 at 7.4% but shifts stance to 'calibrated tightening'.India's Q 2 GDP growth has slowed down to 7.1%,which needs policy support.However,global fuel prices have eased and rupee has gained strength during last fortnight. RBI may not change the benchmark lending rate (repo) despite moderation in economic growth as policy mandate is to support growth while anchoring inflation.

Dr. Manoranjan Sharma and Dr. A K Misra

The RBI is likely to keep the repo rate unchanged at 6.50 % in its fifth bi-monthly monetary policy review on December 5 as the benign position of currency, oil, external condition, and headline CPI inflation, make a strong and compelling case for the RBI pressing the pause button. The interest rate could start inching up once again in the next financial year with oil and currency direction playing the spoilsport.

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