RBI: Worst Days Over, Yet : INFLATION, PRIVATE BANKS WORRISOME…

Sarkaritel
By Sarkaritel December 11, 2017 10:31


RBI: Worst Days Over, Yet

INFLATION, PRIVATE BANKS WORRISOME

By Shivaji Sarkar

The slowdown has bottomed out, asserts RBI. Indeed, a positive indicator in the last over a year whereby India’s economy has gone through a difficult ride. Now there should be change.

Importantly, the Reserve Bank has demystified the functioning of private banks which showcases they have more stressed assets than the public sector ones. Besides, the Bank sees farm loan waivers and GST cuts as risks for the slippage in fiscal deficit. Wherein, it is going beyond the limits of 3.2% thereby setting of fears which might add to inflationary trends.

True, the RBI has left the repo and reverse repo rates unchanged as it has an overall positive outlook for an improved growth prospects. Yet it is concerned about rising prices and consequent increase in the fiscal deficit.

Pertinently, despite this, growth is projected at 7% as per gross valued added which by the last quarter — January-March 2018 — is likely to rise to 7.8%. On overall projection it has stuck to its October figures of 6.7%.

Undoubtedly, the latest RBI monetary policy review indicates the economy is poised for a change. This is necessary for an economy that has seen consumer confidence declining, business sentiment in manufacturing dipping, inflation on the rise and growth sliding according to what a series of RBI consumer surveys found.

Moreover, the positives in the economy are that more funds are being raised from the primary capital market after several years of sluggish activity. As the capital raised is deployed to set up new projects  this will lead to demand in the short run and boost the growth potential over the medium term.

However, jobs remain a major concern. People are yet not confident that they would see happier days. But on the basis of gross valued added (GVA), the Central Bank feels that the worst days are over and the country has come out of many blues which had slowed it down.

Also, the nation needs to feel a bit concerned about its rise in inflation forecast by ten base points from its earlier range of 4.24-4.26% to 4.3-4.7%. This is above the RBI’s comfort zone of 4%.

Though it does not say that rising bank charges and real interest rates are adding to inflation but there are indications that the Central Bank is concerned about it. In fact, the real interest rates are stated to be one of the highest in the world.

Interestingly, there is another dimension to this. The lowering of deposit interest rates is also becoming an issue with the people along-with the rate of savings which India has been known for.

As it stands, most developments not only during the pre-liberalisation era but even after liberalization have been driven by small savings and bank deposits unlike many western countries which are determined by investments by large groups.

Notably, this is a tightrope walk. Inflation will rise because of the rise in global oil prices which results in firming of fuel prices. Add to this, food and vegetable inflation is rising on many counts as there have been shortfalls in kharif production and rabi sowing further firming up consumer prices.

This has forced the RBI to hold on to interest rates and if inflation goes beyond 5%, it would be forced to increase the interest rates thereby adding to the cost of businesses. The Central Bank finds that prices are bound to rise as the Government has increased house rent allowance for its employees.

It states headline consumer price inflation is expected to increase to 55 in the first quarter of 2018-19. Core inflation — CPI, excluding food and beverages, pan, tobacco and intoxicants and fuel and light — which is currently higher than headline inflation, is also expected to increase by 60 basis points to 4.9% in Q2:2018-19.

Additionally, the ultimate cost of inflation would be borne by the Government as its costs for projects and governance are bound to increase. This is likely to cast a shadow over the fiscal deficit, which has been increasing. The international rating agency Standard and Poor’s has expressed this apprehension some weeks back and refused to upgrade India’s rating.

Consequently, inflation would also add to the cost of international borrowings as it is taken by lenders as an additional risk. The cycle could further complicate the investments. According to the RBI survey, its consumer survey reflected respondents’ pessimism on the price level.

The Central bank has found it strange that banks in most cases had not passed on the benefits of interest cut to the depositors. In addition, they hiked their fees and charges further causing problem for everyone including large businesses.

Hence, the RBI has come out with a reform and recapitalization package for banks. The Rs 21,000 crores package is being tailored in a way so that it would be favourable to prudent banks. It has also taken steps against under-reporting of NPAs (non performing assets). “What has changed is transparency that we have brought in the form of disclosures”, says RBI Governor Urjit Patel.

Further, the recapitalization bonds will be more useful for banks which have used their capital to lend better, besides providing for bad loans. The other banks would receive Government contribution based on their resolve and progress towards reform in a significant time bound manner, such as becoming slim and trim by adoption of better and focused business strategies as also possibly no core asset sales.

Succinctly, it means giving up all bad burdens and managing lending carefully.

Undeniably, the Central bank is applying stricter but prudent norms to make banks more functional at lower costs. It is closely monitoring banks’ books and transparency has been brought in disclosures in divergences if they are above the stipulated limits.

This has brought out facts that during 2016 many banks under-reported NPAs. Therefore, the change of rules has led to a sharp rise in NPAs and ensuing jumps in provision for dud assets. This has eroded their bottom lines and erosion of wealth for investors.

In sum, this has demystified the private banks. They have come out with more bad assets than it was believed earlier. Clearly, this should be an eye-opener for those dealing with private banks.

All in all, the new monetary policy has set new standards for assessing the economy as also more responsibility on banks. It surmises that the economy’s worst days are over and this should bring in cheers in the run up to the annual budget.—– INFA

(Copyright, India News & Feature Alliance)

Sarkaritel
By Sarkaritel December 11, 2017 10:31