RBI's credit policy will have to be a balancing act
Vinod Anand | 09 Sep 2011

The credit policy in India will be announced by the RBI Governor. The government can do nothing much than to allow the RBI to go ahead in pumping in more bank funds to give a boost to the economy.

BUT WE must remember that it is not the lack of liquidity, which causes the slowdown in the economy. The issue is quite debatable whether high fund alone could be responsible for the of the economy since in the past. India has witnessed faster development despite high lending rates. Apart from many other things like lack of exports, lack of internal demand is also a major cause for the occasional down-swing.

In fact, the Government should not play around with fiscal deficit by hiking public spending, especially non-planned expenditure. We all know from where exactly this money comes and goes. It comes from banks and goes for non-planned expenditure for the benefit of the politicians (called the political entrepreneurs in terms of what we call “New Political Economy). The ultimate consequences of such expenditure is quite crucial for the economy. In the past India has witnessed faster development despite high rates.. In fact, the banks should reduce prime lending rates following the cut in the RBI’s bank rate. But this cannot be done in isolation unless banks reduce interest rates on savings because of the need to maintain the crucial difference between the lending and deposit rates. It is here that the RBI Governor’s managerial skill faces a test.

The industry quite often complains that real interest rates are very high in India and in the absence of a fall in the deposit rates. If the industry holds interest rates on savings as a contentious issue, then should it also not clean up its own clipboards and turn over the defaulters as is evident from the non-performing assets NPAs?

As far as the householders who contribute the maximum to domestic savings are concerned, a deliberate cut in savings rate in the absence of social security, pension facility, and health insurance etc., will only make their lives even more difficult notwithstanding the statistically low inflation rate. In fact, these are issues which the RBI and the government should address seriously.