Debut cheer

The announcement of a 25 basis point repo rate cut by the Monetary Policy Committee would have taken few by surprise. It reflects both the needs of the economy as well as a sense of confidence in its macroeconomic fundamentals. With investment in need of a fillip and food price-driven retail inflation (perhaps less so inflationary expectations) trending downward, this was the right time to strike. A rate cut at this stage will complement the growth stimulus of the Seventh Pay Commission and the rise in rural demand as a result of a well distributed monsoon and a good kharif season. It will lower the costs of government borrowing at a time when public spending is crucial to keep growth going. Besides, a lower rate is also in alignment with the downtrend in rates worldwide. An excessive hardening of the rupee (with too wide an interest rate differential) would hurt export prospects in a global economy that continues to sputter. India’s macroeconomic fundamentals allow it the room to cut rates — retail inflation headed below 5 per cent, a current account deficit of 1.2 per cent of GDP, forex reserves of $375 billion (enough to weather $26 billion FCNR (B) redemptions) and an economy likely to move up towards 8 per cent growth with a bit of nudging. Yet, a bigger cut was really not on the cards, given the decline in savings and its eventual impact on the current account gap. However, the RBI seems content with a smaller, 1.25 percentage point gap between the repo rate and inflation. This is a significant departure from the past with implications for savers.

The bigger story of this review is the historic passing of the baton from the RBI to the MPC. There was no mistaking a shift in approach, both in terms of style and policy substance. The press conference was brief, shorn of atmospherics and almost a non-event. Governor Urjit Patel was matter-of-fact in his replies to questions — but his team spelt out the contours of change.

A major policy shift pertains to the treatment of non-performing assets. Implicitly acknowledging that the RBI had gone too far in imposing stringent NPA norms, to the extent of discouraging lending altogether, the RBI announced a change in the ‘S4A’ (or Scheme for Sustainable Structuring of Stressed Assets) scheme. Now, the sustainable part of the stressed loan can be treated as ‘standard’ rather than ‘NPA’, allowing banks more room to lend. There could be practical issues though, as subjective calls need to be taken on the question of what is ‘sustainable’. An acknowledgment that six core sectors were responsible for 61 per cent of the NPAs also indicates that a broad spectrum medicine is not in order. While this suggests that the earlier triangular friction between banks, the RBI and the Centre over NPAs has been sorted out, the standards of autonomy set by Patel’s predecessors should not suffer in the bargain. The new team has its task cut out.

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