RBI on guard

The Reserve Bank’s latest monetary policy review, while reflecting an expectedly cautious stance, also shows clearly that it is beginning to distance itself as the central banker from being too closely associated with the Central government’s policy making. So much so, that its 6-member Monetary Policy Committee (MPC) declined the Fince Ministry’s invitation for a meeting before bringing out its review. And in this fourth review on the trot, the MPC thought it fit that the key interest rate should be held at 6.25 percent. However, the MPC’s decision was not unimous as it has been since it began setting interest rates last October, with one member opposing the decision to keep unchanged the Repo rate — the rate at which the RBI lends to commercial banks. With inflation down to near 3 percent but GDP growth also lowest in last two years (6.1 percent in last January-March quarter), the Central government had been making clear that it expected a reduction in the Repo rate, which would motivate commercial banks to lend more after accessing funds at a cheaper rate. In fact, Reserve Bank Governor Urjit Patel was specifically asked at the press briefing whether the Fince Ministry’s invite was an attempt to pressurise the RBI. While parrying the question, Patel was careful to delink the GDP slowdown from the Prime Minister’s demonetisation move. Rather, he contended that the slowdown was apparent from the first quarter of 2016-17 fiscal due to ‘deceleration in capital formation’. He singled out agriculture and mining as remaining ‘uffected’ by the cash ban, despite being cash intensive sectors, while manufacturing, transport and communication staying resilient in the second half of 2016-17, and ‘rural wage growth remaining elevated’. The exception was the construction sector, with the RBI Governor’s telling observation: “Construction was impacted, but it was predictable since the attack was on black money, given the circumstances in which the sector operates.”

However, the RBI Governor struck a note of caution on state governments waiving off farm loans, with states like Maharashtra and Uttar Pradesh vying to announce humongous loan waivers. This is one issue that is likely to snowball in coming days, ever since the incoming Yogi Adityath government in UP announced a Rs 36,000 loan waiver for farmers in keeping with Prime Minister rendra Modi’s campaign promise. As farmers in Maharashtra raised similar demands, Chief Minister Devendra Fadvis had to reverse his opposition that loan waivers, while helping farmers get rid of current debt, ‘do not increase their repaying capacity when they go for the next crop loan’. Facing a massive farmers’ agitation, he had to come out with a Rs 30,000 loan waiver, which has failed to mollify the farmers. Meanwhile, in Madhya Pradesh, farmer unrest has exploded with six farmers shot dead by police during violent protests recently. State governments are thus paying for populism with steep rise in public debt as a whole, even as farmers see little relief in terms of lower interest rates, support prices for their produce and elimition of ruthless profiteering by middlemen. In the past, RBI Governor Patel and NBARD had warned that loan waivers may induce other farmers to stop repaying their loans. On Wednesday, Patel was more guarded when he warned of ‘fiscal slippages’ leading to inflation due to announcement of large farm loan waivers. Overall, the Reserve Bank in its latest review has said it wants to keep an eye on inflation so that it remains under control, while pegging growth forecasts to 7.3 percent for 2017-18 fiscal — on the back of positive trends in manufacturing and exports as well as rising rural demand. Looking abroad, it has noted visible growth in advanced economies, along with ‘political risks’. However, the latest Central Statistics Office (CSO) data on the country’s GDP show that growth has been impacted across a broad range of sectors, which contradicts the RBI Governor’s cautious optimism. While opposition parties are blaming Prime Minister Modi’s demonetisation move for the economic slowdown, those in his support contend that the downturn was expected — given the choking of black money supply lines. It remains to be seen whether the countrywide rollout of Goods and Services Tax (GST) and an expected normal monsoon this year will make the RBI more bullish about the country’s growth prospects in the current fiscal.