Reserve Bank of India (RBI) Governor Raghuram Rajan on Monday highlighted the upside risks to inflation and said that the Indian economy is still growing below its potential. According to the Governor, the key weakness is in investment, with private corporate investment subdued because of low capacity utilisation, and public investment slow in rolling out in some sectors.
Last week, Economic Affairs Secretary Shaktikanta Das was quoted by agencies as saying that the Indian economy — which grew at 7.6 per cent in FY16 — is expected to grow 8 per cent in FY17 owing to good monsoon. “Inflation projections are still at the upper limits of RBI’s inflation objective,” wrote Rajan in the foreword to RBI’s annual report 2015-16. Rajan also said the willingness of banks to cut lending rates is muted.
“Not only does weak corporate investment reduce the volume of new profitable loans, their stressed assets have tightened capital positions, which may prevent them from lending freely. Certainly, the reluctance to lend to industry and small businesses is more visible among the more stressed public sector banks compared to the private sector banks,” said Rajan.
Rajan said in the short term the central bank will focus on bringing down inflation towards the government-set target of 4 per cent. “… thus far the RBI has followed a gentle glide path, aiming at 5 per cent by March 2017 after having coming below 6 per cent in January 2016,” said Rajan.
The Governor said that both the government and the RBI have been engaged in the last few years in restoring macroeconomic stability to the economy and while the policy actions have had positive effects, these are a number of areas which should be considered “work in progress”. However, the Governor also said that a good monsoon along with more money in the hands of government employees due to implementation of 7th Pay Commission recommendations is likely to boost consumer demand.
“A virtuous cycle of growth is possible, reinforced by anticipation of the coming benefits from reforms like the recently passed goods and services tax (GST) legislation in Parliament,” said Rajan. On stressed assets Rajan said that while the asset quality review initiated in the last fiscal has improved recognition and provisioning of non-performing assets (NPAs), more focus needs on improving operational efficiency and creating the right capital structure for all shareholders.
Rajan also said that some of the current difficulties in managing stressed assets arise from lenders’ attitude towards these schemes as just a method of postponement of bad loan formation. “RBI will continue monitoring to see that schemes are used as warranted,” said Rajan. The outgoing Governor said this year the central bank will also look into mis-selling of insurance products by banks. Apart from this Rajan said in the medium term the RBI is aiming to strengthen the level of governance and risk management including cyber risk across public sector banks in India.
“RBI’s supervision will look into all these aspects, and also strictly enforce penalties for non-compliance with regulations or remedial action plans,” said Rajan.