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Central bankers around the world are an unenviable lot these days as they grapple with an economic downturn that is yet to respond in full measure to their monetary policies. For RBI Governor, Dr D. Subbarao, the limits of monetary policy are even more palpable than they would be for his counterparts elsewhere. As he has noted, the RBI’s key rate changes run up against transmission bottlenecks that delay the softening of interest rates for borrowers. Yet that has not stopped the central bank from doing the expected yet again in a bid to persuade banks to lend more aggressively. But will they?

The credit policy for 2009-10 cuts 0.25 percentage points each in the repo and reverse repo rates thus bringing them down to 4.75 per cent and 3.25 per cent respectively. Symbolic as the rate cuts appear in view of the depth of the slide across almost all growth indictors, they are in tune with the central bank’s consistent attempt to soften the credit environment since September. Yet even though successive snips and other monetary measures have increased liquidity by around Rs 4,22,000 crore, non-food credit has recorded a modest 20 per cent growth at the close of 2008-09. That compares well in relation to the global trend where the bank credit is still frozen just as even the modest GDP growth forecast of 6 per cent for the new fiscal gets us way ahead of many countries. But has the full potential for growth even in this depressed environment been realised? The central bank tells us that weak global demand is a strong depressant but then the fall in private consumption demand has been offset by an increase in government demand after the Sixth Pay Commission and other stimulus measures. The 20 per cent growth in non-food credit could be improved upon if banks are assured sustained liquidity over the medium term and if they make every effort to reduce the cost of credit. Heavy market borrowings by the government can prevent interest rates from going down over the medium term, but given that inflation will turn negative soon and be no more than 4 per cent by the end of the fiscal, there is enough room for banks to lower deposit rates, and therefore, the lending rates as well.

Yet this is also the best time for banks to look elsewhere to lower costs. Public sector banks that account for nearly 70 per cent of business must seriously look at cutting transaction costs so that they can deal as profitably and as willingly with the small borrower as they do with the large. The answer may lie in rapid technology upgradation across public sector banks. The RBI must ensure that is done especially if it wants its monetary interventions transmitted smoothly through the economy.

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