Has RBI washed its hands of growth?

The general disappointment at the RBI keeping its key policy rates unchanged is understandable as the RBI was expected to reduce rates in order to stimulate growth. Growth, which had been going downwards consistently for over a year, had plummeted to 5.7 per cent in the April-June quarter, the lowest in three years. The acceleration was largely due to demonetisation and the hasty introduction of the Goods and Services Tax that created a lot of uncertainty.

The credit policy announced by Urjit Patel, governor of the RBI, revealed that the central bank was more interested in keeping inflation rate in line with the targeted 4 per cent even if it meant revising the growth rate downwards drastically to 6.7 per cent from 7.3 per cent it had projected two months ago. It has in effect washed its hands off the responsibility for growth of the economy, leaving the government to walk the path to growth on its own. The situation is very akin to what former finance minister P. Chidambaram faced when D. Subbarao was the RBI governor. Mr Chidambaram had then said he would walk alone if he had to, since the governor refused to cut policy rates. The RBI is of the view that it has cut rates adequately and intends to work with banks to see how the advantage of these cuts can be transmitted to borrowers. It has recognised the stressed assets issue that banks are facing and has rightfully called on the government to recapitalise banks so that they can start lending and growth is not impeded due to lack of funds. It is disappointing that the central bank did nothing to fuel private investment and this is probably due to its stand that fiscal and administrative measures and not monetary, are required to stimulate this investment.

Admittedly cutting interest rates would not mean that investment would happen the next day or next week, but it would have a positive psychological impact on companies that have to deleverage their balance sheets. The RBI in fact seemed to be working in a silo implying that its job was to maintain fiscal stability by keeping inflation under control. This goes against the grain of the role of a central bank. In times of crisis the central banks worldwide work in tandem with the government to tackle economic issues. In India’s case, the RBI seems more interested in keeping inflation on target. It expects inflation to rise to 4.6 per cent against the targeted 4 per cent, hence it did not feel the need to cut interest rates. There is also enough liquidity at around Rs 1,35,000 crores, available in the banking system.

Whilst kicking the can down the street and washing its hands of responsibility for growth, the RBI has recognised that the structural reform measures that the government has taken, like the ease of doing business, restarting projects that had been stalled and formalising the economy will help growth in the medium to long term. For now the economy will have to bear the pain of slow growth.