Some serious concerns of  the Reserve Bank

October 6, 2017, 2:29 pm


Some serious concerns of  the Reserve Bank
SPOTLIGHT
SPOTLIGHT


Some serious concerns of  the Reserve Bank

Some serious concerns of  the Reserve Bank

Nothing happened unexpectedly. Reserve Bank of India (RBI) has kept the base rates in tact, at least for the time being. Repo rate will remain at 6 percent and reverse repo will be 5.5 percent and the decision is in the expeced lines.  A notable shift in the bi-monthly revision of the credit policy, announced on Wednesday,  was the reduction in the Statutory Liqudity Ratio (SLR) by 50 basis points to 19.5 percent. Commercial Banks are likely to get some breathing space through this change.In the one year since the setting up of the Monetary Policy Committee (MPC) in October 2016, it has lowered repo rate twice, by 25 basis points each in October 2016 and  August 2017. This time the voting in the MPC was in favour of maintaining statusco.

Yet, the  Reserve Bank also shares some serious concerns over the  present status of the Indian economy through the policy announcement. RBI projects the inflation rate for the second half of the current financial year [October – March] in a range of 4.2 to 4.6 percent. Earlier, this was in a range of 4 – 4.5 percent. But the crucial  issue is that the inflation rate for the month of August was only 3.6 per cent. Even if it happens in the expected lines, there is a possibility of 1 percent  hike in the next six months period.   This means that a general price hike is on anvil, especially in the case of food items. Some economically illogical decisions of the government, like the ban on high denominated currency notes and untimely implementation of GST had fueled inflation. So it may be aptly called as a government sponsored economic disaster. Further to that daily hike in the prices of diesel and petrol has a spiraling effect on the prices which affects the common man very badly. In a way,  the government is  supplying power to price hike,  instead of regulating the diesel, petrol and LPG markets.

RBI in its report revisited the rate in the case of Gross Value Added (GVA) growth. The revised estimates tells that GVA is projected at 6.7 per cent instead of the earlier estimate of 7.3 percent. This does not match  with the long term growth prospects shared by Prime Minister Narendra Modi and Finance minister Arun Jaitley. RBI also shares concern over the short term dip in the economy, especially in the manufacturing sector, due to the introduction of GST. RBI said that this would have serious impact on the fresh investments, especially in the private sector. This statement is in contradictory with the expectations on long term growth indicated  by the prime minister and finance minister.

Yet another major concern of the RBI  is the galloping fiscal deficit. The policy report states that the combined fiscal deficit of central and states is to the tune of 6 per cent of the GDP, which is fairly larger. In the case of central government, Arun Jaitley has recently stated that the deficit can not be controlled at a level of 3. 4 per cent, as projected in the last budget. This may go up to 3.7 percent in the light of stimulus package of Rs 50,000 crore. RBI’s concern is that the serious case of fiscal deficit would have adverse effects on the  stimulus packages. Such packages which are essential for revitalising the economy,  may result in hike in inflation rate. So it is a critical juncture when macro economic factors are concerned. Obviously, this is the by-product of some hasty decisions by the ruling Modi government. As Dr. Manmohan Singh rightly said  Indian economy is now on a dangerous zone and it asks for some well thought decisions and quick actions.