Source: The Hitavada      Date: 09 Feb 2019 11:12:29

UNDER the regime of new Governor of the Reserve Bank of India (RBI) Mr. Shaktikanta Das, the decision of far reaching importance to cut interest rates has been taken on Thursday by the Monetary Policy Committee (MCP) of the apex bank.The decision has come after 18 months when the last cut was declared and hence a long awaited and welcome decision. There has been a persistent demand for reducing borrowing rates so as to bring down interest costs and thereby spur much needed investment in private sector. However, earlier Governors, Mr. Raghuram Rajan and later Mr. Urjit Patel resisted pressure as they were more concerned about the mandate of controlling inflation rate. The Government and the RBI Governors appeared to be not on the same page as their perceptions differed over lowering of interest rates. While inflation still remains the focal point of monetary policy of the RBI, the new Governor appears to be more amenable to the Government’s concern over stagnation in private sector investment. Thursday’s decision of the MCP to bring down the repo and reverse repo rates appears to be the change in the stance of the apex bank in regard to cheaper credit.

In the last more than four years it was the Government that was making heavy investments in infrastructure projects but there was hardly any marked improvement in the private sector investment. One of the reasons for this was cited as the high lending rates of banks which acted as a deterrent against taking investment decision in the private sector. This in spite of the fact that the Government had introduced several policy reforms that should have acted as an incentive for the private sector to take investment decisions because the atmosphere has changed for ease of doing business in the country. The trade and corporate bodies have been urging the RBI to end its hawkish stance on monetary policy. The Government too had been suggesting a change in policy stance of the RBI. Now things appear to be changing for the better.

It was vital that there was revival of investment in the private sector for employment rate to pick up and thereby demand to go up. It was then only that the private sector could draw up plans for new investments. This was especially true of the small sector whose employment potential is much more than the large corporate manufacturing sector where automation has replaced much of the labour force. Thursday’s decision of the Reserve Bank would be wholeheartedly welcomed especially by the MSME (Micro, Small and Medium Enterprises) sector as their borrowing costs would come down.

The Government as well as the private sector have been stressing on improving the liquidity position of commercial banks, particularly in the public sector to put enough money with them to meet the credit demands of the business community, besides lowering of the interest rates. Over the last few budgets the Government, on its part, has been pumping in money into the banking system to recapitalise them in the wake of the large scale frauds and loan defaults of astronomical amounts. Besides improving the liquidity position of the banks, the Government’s and that of the RBI’s priority was to restore the banking system to good health so as to enable them to discharge their responsibility of meeting the needs of the business community.

The 2.9 pc inflation rate in the month of December 18 appears to have enthused the RBI to change its hawkish stance on interest rates regime. Further projection on this count remains encouraging, prompting the RBI to project a GDP growth rate of 7.4 pc for FY20 higher than the current fiscal’s 7.2 pc. The reality sector would certainly welcome the reprieve from the high interest rate regime and emerge out of persisting stagnation.